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Mortgage standards dropping in Australia. Credit easing?; Banks reduce mortgage lending standards
Topic Started: 23 Dec 2010, 09:43 PM (8,048 Views)
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http://www.unconventionaleconomist.com/2010/12/westpac-drops-mortgage-lending.html

Westpac drops mortgage lending standards

Earlier this month I warned of the unintended consequences of increased bank competition. This article described how the intensification of competition for mortgage lending in Australia from the mid-1990s caused credit standards to drop and offshore borrowings to explode. The resulting increase in the availability of credit arising from this increased competition, combined with unresponsive housing supply, has caused the housing bubble that Australia experiences today, with housing affordability now near all time lows.

Just when you thought mortgage lending standards in Australia couldn't get much lower, Westpac has announced possibly the most irresponsible relaxing of lending standards by a major bank ever seen in Australia.

Today, Banking Day reported the following from Westpac:

Rent Equals Savings for Westpac:

One year’s worth of rent payments will count as savings at one Westpac brand.

Westpac is changing its treatment of savings, through St George.

Defining one year’s rent payments as being equivalent to savings widens the target market for the bank’s home loans, including plenty of genuine prospects.

Dean Rushton of Loan Market yesterday publicised the shift in credit standards.

Rushton said St George will accept rent as a form of savings for a home deposit if there is evidence of a minimum of 12 months’ continuous satisfactory rental history and the property is leased through a licensed property manager.

He applauded the stance in an email yesterday.

“Australian lenders require a percentage of the purchase price – normally a five per cent minimum – to be saved for all loans, but it is extremely difficult for people paying the exorbitant rents customary these days to save money.”Rushton wrote that “we expect other lenders to follow suit.”

I love the way that Rushton attempts to sell this as a housing affordability measure when it is obvious that, if widely adopted, the extra funds available to borrowers under this scheme would get quickly capitalised into house prices, making homes even less affordable for younger Australians. What's worse, a large chunk of the funds used to underwrite these loans would need to be borrowed from the wholesale debt markets, resulting in a even heavier reliance on unstable offshore funding by Australia's banks. Australia's financial stability would be significantly weakened as a result.

As Delusional Economics once said:

Affordability is the measure of a cost relative to income. It is not a measure of how easy it is to go into debt. Buyers are "priced out of the market" because prices are too high relative to incomes, not relative to the home loan they can receive from a lender with dodgy standards. Lowering credit criteria or shovelling incentives at people will do what it did last time. Create false short-term demand, push up prices that will then create an even bigger problem. What do we do next? Offer 125% LVR loans?

Lowering LVRs will in no way lead to more affordable housing, it will simply mean that more poor fools go into debt in the belief that they are on the road to riches while paying over-inflated prices for an asset that is already oversupplied.

Australian banks under the guidance of the RBA should be attempting to slowly deflate the Australian market to remove the massive systematic risk it now presents the country. It seems to have got so big now that the banks feel the need to constantly misinform and fudge figures to keep it going.

It seems Australia's banks have learned nothing from the Global Financial Crisis, in particular the dramatic housing crashes experienced in the United States, Ireland, Spain, and elsewhere. You would hope that Australia's 'conservative' and 'well-run' banking system would have studied these markets in depth, learned from their mistakes, and implemented more prudent and sustainable lending standards.

Anyone still seeking to understand the damage that can be caused by intense banking competition and lax mortgage lending standards are encouraged to watch the below video extracts from the excellent Irish documentary "Freefall".

http://www.youtube.com/watch?v=HID2KnaTB5

http://www.youtube.com/watch?v=BQ9UhMHWB2g

When will Australia learn: WE ARE NOT DIFFERENT!
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http://www.debtdeflation.com/blogs/

Loan standards drop to keep the bubble afloat
Posted on December 23, 2010 by Steve Keen


I’ve just been alerted by Banking Day (a subscriber-only service) that Westpac–via its subsidiary St George–is now allowing potential borrowers to treat their rental payments as “evidence of genuine savings” when applying for a home loan.

This is of course portrayed as good thing in the press release that announced the development–issued by the broker Loan Market (see the press release at the end of this post). It will, they state, enable Australians who currently can’t afford to buy a home–because they can’t save a deposit–to do so. All good news.

The more cynical interpretation is that this is a way to let banks increase their maximum LVR (loan to valuation ratio) without actually saying so, and to expand their pool of potential borrowers as a consequence. At present, you need a $30,000 deposit to bid $1 million for a property if you get a loan from the Commonwealth Bank, which currently has one of the highest maximum LVRs of 97%: “The maximum we will lend you is 95% of the valuation amount. We also add the Lenders Mortgage Insurance or a Low Deposit Premium to your loan (up to a maximum of 97%), so it doesn’t cost you anything upfront”.

This press release implies that you could approach St George with $20,000 in savings, be given a $1 million loan, and have it recorded as a 95% LVR loan (since St George probably has the same maximum published LVR as Westpac of 95%) where $20,000 was your actual deposit and the effective LVR was actually 98%.

The effect of this trick is to expand the pool of potential borrowers to whom St George can extend a loan, while appearing not to alter its lending standards.

There’s at least one line that I agree with in the following press release: “This is a major step forward which will also boost activity in the struggling home finance sector and we expect other lenders to follow suit.” It will enable the banks to meet their loan sale targets, by expanding the number of applicants who qualify for a loan.

To me, this move smacks of desperation. The house price bubble has made entry into the market impossible without sky-high LVRs, and this in turn has undercut the banks’ business model. Increasing their maximum LVRs by around 5% back at the end of August apparently wasn’t enough to secure the level of loans business they wanted, and St George’s response is this ruse that gives a higher LVR without calling it such.

It will be interesting to see how regulators treat this: will they allow rent that you’ve already paid to a landlord to be recorded as “evidence of genuine savings” and pretend that St George hasn’t increased its maximum LVR?

The Loan Market Press Release

RENTAL HISTORY CAN NOW HELP OBTAIN HOME LOAN

December 22, 2010

Call For Banks To Recognise Rent Answered

Repeated calls by Australia’s largest independently owned mortgage broker Loan Market for banks to allow people applying for a home loan to use rental payments as evidence of genuine savings has been answered by one of the nation’s major lenders.

Loan Market Chief Operating Officer Dean Rushton said St George had become the first Australian bank to change its requirements in regards to rental payments, in a move which will provide much needed assistance to first home buyers.

Mr Rushton said St George will accept rent as a form of savings for a home deposit if there is evidence of a minimum of 12 months’ continuous, satisfactory rental history and the property is leased through a licensed property manager.

“This is a significant breakthrough for first homebuyers and a move which could be a major boost to the home finance industry,” Mr Rushton said.

“Higher interest rates, tougher lending conditions and the end of the boosted federal government grant at the end of last year have driven first time buyers out of the market.

“Another major restriction for them has been the difficulty in saving a deposit for a home loan, particularly in this economic climate with people having to cope with massive cost of living increases including rental payments.

“Australian lenders require a percentage of the purchase price – normally five per cent minimum – to be saved for all loans but it is extremely difficult for people paying the exorbitant rents customary these days to save money.

“But if rental payments were taken into consideration as a factor in assessing genuine savings that would enable many people to pursue the dream of home ownership.

“St George has now moved to accept rental history as a form of genuine savings and they should be applauded for this decision as it will enable a lot more people to realise the great Australian dream of home ownership.

“This is a major step forward which will also boost activity in the struggling home finance sector and we expect other lenders to follow suit.”

ENDS
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raveswei
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One year’s worth of rent payments will count as savings at one Westpac brand.

Westpac is changing its treatment of savings, through St George.

Defining one year’s rent payments as being equivalent to savings widens the target market for the bank’s home loans, including plenty of genuine prospects.

Dean Rushton of Loan Market yesterday publicised the shift in credit standards.

Rushton said St George will accept rent as a form of savings for a home deposit if there is evidence of a minimum of 12 months’ continuous satisfactory rental history and the property is leased through a licensed property manager.


zero down- no subprime here, we are different :cool:
http://popping-bubble.blogspot.com/

Thinking of an Australian property speculator (PI):
Inaction = missing opportunities.
Missing opportunities = losing.
Too much thinking = inaction.
Thinking = missing opportunities.
Therefore thinking = losing.

disgraceful little man Frank Castle owes a house to Salvation Army

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Catweasel
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raveswei
24 Dec 2010, 08:28 AM


zero down- no subprime here, we are different :cool:
Catweasel see this and simply a laugh. What a next? 12 months consecutive salary equal a savings? Mouse not the head in agree of top bank man say.
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barns
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I think this is fair enough. If people can hold down a job (or a few jobs) for a year and meet their rent payments on time they should be 'allowed' to try and buy a house.

What the banks should really do is interview the landlords of these people to see if they are the type of people that we want owning houses. (puts on flame suit)
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
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hoofarted
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barns
24 Dec 2010, 09:07 AM
What the banks should really do is interview the landlords of these people to see if they are the type of people that we want owning houses. (puts on flame suit)
You going to get flamed by the other bulls?

After all, you are not renting the house from the bank.... You own the house but rent the debt.

Screwed up heh?
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barns
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farty - I don't understand what you are saying. Maybe it's just me but your sentence structure doesn't lend itself to comprehension.

PS No offence intended. Merry Christmas
Edited by barns, 24 Dec 2010, 09:57 AM.
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
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nuff_ced
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Why does home ownership constantly need to be made easier & easier for everyone to get into if the foundations are so strong? We don’t want the rental scum joining our lucky ranks. Still I don’t think it will help much as the amount of rent paid currently was put towards a mortgage would mean the tenant would have to move much further outward. Not too many would sign up for that privilege I would think.

Anyway what next? I know! Fuel receipts – because if that money went towards a mortgage on a house closer to the city, the new owner would save that on petrol costs driving from the burbs everyday.
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davel
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barns
24 Dec 2010, 09:07 AM
I think this is fair enough. If people can hold down a job (or a few jobs) for a year and meet their rent payments on time they should be 'allowed' to try and buy a house.

What the banks should really do is interview the landlords of these people to see if they are the type of people that we want owning houses. (puts on flame suit)
Barns, please.

So if I pay $30k in rent for a year, you as my bank manager will lend me $1mil to buy a property (97% LTV). Because I deserve it because I've managed to pay my rent on time, "sorry I couldnt save any actual money cos I was paying my rent".

Are you nuts?

Maybe we can also pay the Stamp Duty this way?
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carter
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Tasman Vagrant

nuff_ced
24 Dec 2010, 10:17 AM
Anyway what next? I know! Fuel receipts – because if that money went towards a mortgage on a house closer to the city, the new owner would save that on petrol costs driving from the burbs everyday.
Don't give them ideas!
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