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Why the market doesn't care about liar loans
Topic Started: 14 Sep 2017, 02:27 PM (981 Views)
Rufus
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Why the market doesn't care about liar loans
Michael Pascoe
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I have a "liar loan" – a mortgage based on less than absolutely factual information. I've pretty much always had liar loans. And I recently obtained a "liar credit card". So what?
Given readers' (and therefore the media's) love of stories that combine housing and doomsday scenarios, investment bank UBS received saturation coverage with its idea that $500 billion in "liar loans" are a hanging over the Australian housing market, set to come crashing down on the economy at the first hint of trouble and damn us all to hell.

"We'll all be rooned," said Hanrahan.
I'm calling bullshit. It doesn't pass the common sense test and there's no evidence to support it – only the assertions made in a survey and some rather wild conclusions drawn from that.

Oh, I don't doubt that a fair proportion of mortgage applications are less than "completely factual and accurate". On the basis of a survey (yes, yet another survey) of 907 people who said they took out a mortgage in the past year, UBS reckons 32 per cent of mortgage applications are less than totally ridgy-didge.
Mine have never been. Do you know with complete accuracy what your monthly expenses are? I don't. Faced with another interminable form, I make a rough guess. It would not be accurate. I'm very impressed that 67 per cent of the UBS survey respondents claimed they really know – more power to them and an apparent ability to budget that eludes most of us.

It's much easier to have a solid idea of income – it's there in your tax return. No surprise that the UBS story admits most of the inaccuracies are on the expense side.

Yes, there are some cowboy mortgage brokers encouraging applicants to get the answers right for the loan they want. That's been the case since there were mortgage brokers.
Given the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority are waving their sticks at the banks and the institutions themselves having the odd concern in the present open season on bank bashing, it is very reasonable to think there's been a tightening of prudential standards – but the UBS crew would have you believe the opposite has happened, that standards have loosened.
I don't believe it. And the evidence that actually exists – as opposed to anecdotes – indicates we're far from being awash in American-style liar loans.

The evidence
Loans that are in real stress – not the vague, concocted "I don't have spare cash" mortgage stress purveyed without questioning by 4Corners last month – are running at a relatively low level. Most of the real stress is in Perth and towns that were dependent on the resources construction boom, the relatively limited areas that have seen a rise in unemployment. Nationally, we're doing rather well.

And the latest research by the Reserve Bank shows that the people who you'd think would be the most at risk – stretched first home buyers – are actually paying down their loans as successfully as the pre-GFC generation and that they are much more financially secure than those who didn't bite the bullet. FHBs with bank loans are doing OK – it's those who borrowed from the Bank of Mum and Dad who are more likely to be in trouble.

It's nearly 18 months since a hedge fund manager gained similar headlines after a drive around Sydney's western suburbs and making even wilder claims. And, yes, the hedgie had been shorting Australian banks before the story.

It's nine years since Steve Keen's infamous 60 Minutes interview scaring people about an imminent 40 per cent crash in housing prices with Armageddon to follow. And in between there have been interminable Harry Dents and perma-bears promising that, any day now, Australian housing and banks were set to implode. We're still waiting.
The only surprise about the 4Corners housing beat-up last month was that it didn't include Keen and Dent, but other bears were readily available.

Improbable implosion
Yes, housing in Sydney and Melbourne is eye-wateringly expensive. It is creating societal problems. Real estate wealth – not income – is the core of our inequality concerns. It's quite possible, probable, that some markets are overheated and could do with a correction – but that's not as big a deal as the scaremongers would have you believe.
Do you remember the 10 per cent "crash" in Sydney housing prices in 2008? No, I didn't either until I saw the CoreLogic graph. Sydney prices tend to run ridiculously hard and then go flat until the next time.

The motherlode for doom-and-gloom forecasters is our record level of household debt, nudging 190 per cent of disposable income. It makes for a frightening graph that's a regular excuse for someone to grab a headline with the observation that the RBA wouldn't have to lift rates much to cause a recession. (Memo to such people: the RBA knows that.)

The record-household-debt story is more common than bushfire warnings. Less common is the other half of the RBA chart pack graph – because rates are so low, the servicing that debt is the easiest it's been in 14 years.

And what's never seen is the net household debt story. Our net debt – loans minus cash and other financial assets not including equities or superannuation - actually peaked in 2006, retreated a bit and has been relatively flat for a decade.

There's also the question of what we've been doing with our debt. Most of it has been going into investment, not holidays in Bali and new TVs. Our holdings of financial assets and real estate have risen considerably faster than our debt. The ratio of household debt to assets is the best it's been in a decade.
And then there's superannuation – some $2.3 trillion worth. By comparison, Australia's total housing mortgage book is worth $1.6 trillion out of housing valued at some $6 trillion.

The Big Four banks hold $1.3 trillion in mortgages. Homes make up more than half of their book. That means the banks would be in a spot of bother if the housing market crashed by 40 per cent.

The missing step is that the entire Australian economy would have to be in more than a spot of bother for the housing market to suffer such a plunge. As has been repeatedly demonstrated, it takes a serious rise in unemployment to noticeably increase home loan defaults. Nevertheless, a rise in loans in arrears from one-fifth of stuff-all to one-quarter of stuff-all still results in headlines like: "Housing crisis: problem loans soar 20 per cent"

During our last recession – a tough recession by anyone's standards – Australians did their best to hang onto their homes. Defaults certainly rose, but did become a crisis.
The regulators making interest-only loans more expensive is aimed at encouraging us to continue to build up equity buffers and pay down mortgages. Turns out though that even folks with interest-only loans have a tendency to do that with large offset accounts.

Surplus surveys
Meanwhile, back at the UBS survey – really? We're surveyed to death. How many people want to do the work to supply detailed financial information about their mortgage application and, apparently, admit they lied? Something isn't adding up.

And there's the particular case of the ANZ which received the worst result:
"Of those who took out loans with ANZ in 2017 (directly or through a broker), 55 per cent of respondents stated their application was completely factual and accurate (implying 45 per cent of customers misstated their application), down from 66 per cent in 2016."

It allegedly didn't matter with ANZ whether the loan was done directly with the bank or through a broker.
The ANZ was none too impressed, wondering about the size of the survey for starters. UBS says 907 borrowers had the time and the interest to respond. I asked specifically how many were ANZ customers. UBS said they had not released that information but it was "fair to assume" ANZ was proportionate to its market share.
ANZ has 15.6 per cent of the mortgage market, so that would be 141 ANZ respondents. I wonder.

The most obvious point is, when applying directly to your bank, the bank should know more about your finances than you do anyway. For my "liar loans", all my income and spending washes through the bank cheque account. I'm Australian – near enough is good enough.
And then there's the UBS claim that people were actually finding it easier to get mortgages this year than last. Hmmm – how many people in their survey took out a mortgage in 2016 and took out another one in 2017? Just wondering.

No, it doesn't seem credible – altogether too amazing that prudential standards have gone in the opposite direction to the pressure being applied. Maybe that's why it was such big news.
And it looks like I'm not the only one that doesn't believe it. In the two days says the UBS survey was the front page lead, bank shares have done very nicely indeed. CBA, the bank with the biggest housing book, has seen its shares rally three per cent. ANZ, the one allegedly stuffed with liar loans is up nearly two per cent.
No, the market doesn't believe it either.

Edited by Rufus, 14 Sep 2017, 02:28 PM.
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Chris
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Just reading this, Michael Pascoe at his manic bi polar best.

I like the fact he dismisses the UBS survey but is happy to certify CBA data?! I also like the fact he acknowledges the massive debt to income ratios, the highest in the world but states it's no issue as it's all leveraged in 'investment'?! He is effectively saying that mortgage debt is good debt no matter what.

This bloke is the king of klangers, I can see why you like him Rufy.

He also seems to be incapable of comprehending the fact this 'investment' has been, by in large, born out of fraud, the asset values are then perilessly in danger if these liar loans come unstuck.

He also made a grand Rufus deception attempt by stating these 'liar' Loan's are in fact minor oversights based on monthly expenditure and by that count all loans have done degree of lies as month to month expenditure can vary. He is ignoring the fact that most 'liar' loans or fraudulent broker loans have had significant false reporting of income and expenditure, none of them have been found to have minor discrepancies as he has alluded to.





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Dr Kinetoscope
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Chris
14 Sep 2017, 03:17 PM
Just reading this, Michael Pascoe at his manic bi polar best.

I like the fact he dismisses the UBS survey but is happy to certify CBA data?! I also like the fact he acknowledges the massive debt to income ratios, the highest in the world but states it's no issue as it's all leveraged in 'investment'?! He is effectively saying that mortgage debt is good debt no matter what.

This bloke is the king of klangers, I can see why you like him Rufy.

He also seems to be incapable of comprehending the fact this 'investment' has been, by in large, born out of fraud, the asset values are then perilessly in danger if these liar loans come unstuck.

He also made a grand Rufus deception attempt by stating these 'liar' Loan's are in fact minor oversights based on monthly expenditure and by that count all loans have done degree of lies as month to month expenditure can vary. He is ignoring the fact that most 'liar' loans or fraudulent broker loans have had significant false reporting of income and expenditure, none of them have been found to have minor discrepancies as he has alluded to.





This article is not a surprise.

Don't forget where his employer's priorities lie.

Fairfax is a 'Domain.com.au' driven shell of an organisation these days.

Mark my words, if he said anything negative about mortgage debt there would be a tsunami of complaining advertisers barking down the commercial director's door.

Jessica Irvine is now the same.

But hey, that's what a painfully tight jobs market will do to a journo.
Edited by Dr Kinetoscope, 14 Sep 2017, 03:52 PM.
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Chris
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Dr Kinetoscope
14 Sep 2017, 03:50 PM
This article is not a surprise.

Don't forget where his employer's priorities lie.

Fairfax is a 'Domain.com.au' driven shell of an organisation these days.

Mark my words, if he said anything negative about mortgage debt there would be a tsunami of complaining advertisers barking down the commercial director's door.

Jessica Irvine is now the same.

But hey, that's what a painfully tight jobs market will do to a journo.
I hear ya.

He is suffering from the CARE factor, Cover Arse Retain Employment.
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Rufus
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Dr Kinetoscope
14 Sep 2017, 03:50 PM
This article is not a surprise.

Don't forget where his employer's priorities lie.

Fairfax is a 'Domain.com.au' driven shell of an organisation these days.

Mark my words, if he said anything negative about mortgage debt there would be a tsunami of complaining advertisers barking down the commercial director's door.

Jessica Irvine is now the same.

But hey, that's what a painfully tight jobs market will do to a journo.
He's not wrong. It doesn't matter whether you look at the USA, Canada, Italy, Spain, Russia, Brazil, wherever, people tell little porkies because it's what they think might help them get what they want. Whether that's in their tax return, attempting to push down their income on paper, or in a loan application trying to lift their income on paper.

It's all the same, that's why no one ever takes someone's word for the vital bits of information - it gets checked and supporting documentation must be supplied.

Banks ask for a standard amount of documentation in any loan, but if that doesn't give them the comfort they would like they ask for more information, just as if you lodge a tax return that looks a bit dodgy the ATO will ask for more information in an audit.

Banks lose money when they write a bad loan, so they prefer not to and they take logical steps to avoid it. I have no idea why people find that difficult to grasp, and I don't understand why people would think otherwise. Yes it did happen in the USA where they sold off the loans, so the lenders thought they had gotten rid of any liabilities. It didn't work out that way for lenders in the USA, and it has never been that way here because when our banks did securitise loans they had to replace any bad loans with good loans after a tranche was sold. Our banks always maintained responsibility for the loan quality.

How hard is it to grasp that banks want to make a profit, and not a loss.

Fraud occurs when borrowers or others involved in lending such as brokers or bank staff provide forged documents to get a loan over the line when it shouldn't otherwise be approved. That is a problem, but it's a long way from some guy exaggerating the size of his penis paycheque.
Edited by Rufus, 14 Sep 2017, 06:12 PM.
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herbie
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Dr Kinetoscope
14 Sep 2017, 03:50 PM
This article is not a surprise.

Don't forget where his employer's priorities lie.

Fairfax is a 'Domain.com.au' driven shell of an organisation these days.

Mark my words, if he said anything negative about mortgage debt there would be a tsunami of complaining advertisers barking down the commercial director's door.

Jessica Irvine is now the same.

But hey, that's what a painfully tight jobs market will do to a journo.
Keep feeding him Dr K.

Regardless of how hard and how bad he might have been flogged and continue to get flogged, the one thing that remains assured is that he'll not blame YOU for it - Coz he'll just simply remember you as his nice friend that said the things to him that he was desirous of hearing. ('N hey, just on tha off chance ya should happen ta be right [almost sorta a bit right even?], ya'll be his bosom buddy that woz obviously wise 'n clever 'n intelligent and highly morally principled just like him).

F*** some people are dumb.
Edited by herbie, 14 Sep 2017, 07:06 PM.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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Ex BP Golly
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With virtually all transactions now done through either debit or credit cards, it does not suprise me in the least that Pascoe doesn't have a clue about his money flow.

People who promote themselves as experts often do little more than blow hot air up their own arses.
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herbie
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Ex BP Golly
15 Sep 2017, 07:43 PM
With virtually all transactions now done through either debit or credit cards, it does not suprise me in the least that Pascoe doesn't have a clue about his money flow.
It's pretty usual I suspect Golly?

I had a divorce lawyer look at me once and ask "And what were the financial circumstances of the marriage?"

And when I could lay them out pretty much down pat (with documented evidence as required), the response was pretty much along the lines of "Well f*** me! - When I ask most poor buggers wot's bin happening wif their finances, they can't even tell me anything much very accurate about it for tha last X months, let alone over tha last X years."

And Yes, I could still tell you (or anyone else), just what exactly my fixed expenses on my own home and each of my IPs will most likely be for any month of the year going forward (for example). Plus all sorts of generally pretty spot on details about my finances overall.

But Yep, as stated (and in total accord with what you said), I gather that it is a bit unusual for people 'in general' to be able to do so.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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Ex BP Golly
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herbie
15 Sep 2017, 09:56 PM
It's pretty usual I suspect Golly?

I had a divorce lawyer look at me once and ask "And what were the financial circumstances of the marriage?"

And when I could lay them out pretty much down pat (with documented evidence as required), the response was pretty much along the lines of "Well f*** me! - When I ask most poor buggers wot's bin happening wif their finances, they can't even tell me anything much very accurate about it for tha last X months, let alone over tha last X years."

And Yes, I could still tell you (or anyone else), just what exactly my fixed expenses on my own home and each of my IPs will most likely be for any month of the year going forward (for example). Plus all sorts of generally pretty spot on details about my finances overall.

But Yep, as stated (and in total accord with what you said), I gather that it is a bit unusual for people 'in general' to be able to do so.
At least we know Pascoe is unable to do so :lol
No doubt people will continue to read his drivel though.
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herbie
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Ex BP Golly
15 Sep 2017, 10:07 PM
At least we know Pascoe is unable to do so :lol
No doubt people will continue to read his drivel though.
I asked people here (as in on this site) some time back, what their financial plan was going forward Golly - And I genuinely don't recall getting one?

And I'm a bit weak in that department too - I did pretty much have one; But some council stuff re flood maps chucked a reasonable bit of it up in the air. And the rate at which 'tha f***ers' (and there I'm especially thinking tha Feds) feel to change so many things every budget makes a man (well, one like me anyway) inclined to be most especially conservative/cautionary. (Oh and the announcement by the RBA that they just genuinely DON'T expect their interest rate will return to 'normal' [not as I knew it anyway] in my remaining lifetime by the sounds.)

But anyways Yep, I do 'spose I still have an at least 70% intact financial plan in place - So smile and be happy and continue reworking the rest ... :)

Hmmm - That's Life - Things change I 'spose.
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