Dear Prudence

As mentioned in my last couple of posts, new consumer protection legislation was introduced on January 1 to little media attention. Early last week I noted that the legislation could be having a greater impact on lending than many expected.

However the true measure of the impact of legislation is just how loud the effected vested interests scream (hat tip richard b).

Brokers have come out in support of RE/MAX Geoff Baldwin’s comments that the new NCCP legislation will negatively impact older borrowers.

Yesterday, RE/MAX’s Western Australian managing director Mr Baldwin said any one over the age of 50 could find it hard to seek finance under the National Consumer Credit Protection Act.

According to Mr Baldwin, the NCCP laws will force brokers to prove a borrower has the capacity to repay the loan in full at retirement age without selling their owner occupied property.

The Adviser was yesterday inundated by responses from brokers supporting Mr Baldwin’s critiscims of the NCCP Act.

Aussie broker Warwick Hoy backed Mr Baldwin, describing the new legislation as “draconian”.

“Why should someone 10 years out from retirement be prevented from buying a property and using the equity gained over that time to add additional retirement funding,” Mr Hoy said.

The part of the new act Mr Hoy has an issue with is defined below

The key obligation for licensees is to ensure they do not provide, suggest, or assist with a credit contract that is unsuitable for the consumer. This obligation requires licensees to reasonably inquire and verify customer’s financial circumstances to make an assessment that the credit contract will meet the consumer’s requirements and that the consumer has the capacity to repay the contract.

It all centres on the “capacity to repay”.  Mr Hoy, a broker, seems to think that by purchasing a property and holding it for 10 years then you will automatically have the capacity to pay back any outstanding loan balance simply by selling it. 

This could be a fair assumption, but the entire premise of his argument is that the property value will not be below the value of the mortgage when they come to sell it. Fair enough, given the recent history of Australian housing you would assume that to be correct.  But then again so did people in Japan and the US.. Oh and the Gold Coast for that matter

…. even before the floods there were concerns that at least 30 per cent of Gold Coast property values were lower than the mortgages.

Not convinced by the financial side of the argument? Bring on the moral high ground .

“I know regulation is necessary, but this is draconian.”

Mr Hoy’s comments were largely echoed by The Mortgage Gallery’s Bruce Downing.

According to Mr Downing, the new legislation violates one of the key pillars of Australian society – lack of discrimination.

“This is just another example of the danger of letting bureaucrats, who have no idea how things work in the real world, make rules about things they neither have any practical experience with, or even understand,” Mr Downing said.

“I’m all for regulation and believe that all brokers should be licensed and adhere to strict ethical standards, but NCCP goes way beyond that as it imposes the will of a few uninformed and ideologically motivated individuals on the whole nation.”

Hmm .. financial self-regulation. I am not sure the GFC is that distant a memory. Maybe they can try again in another 5 years.

But just in case you were concerned about the discriminatory effect this legislation is having on the 55+ demographic, have no fear. The courier mail claims the law discriminates against lots of other people as well.

Mortgage lenders are slashing the amount they will lend to couples with children, arguing they are less capable of meeting their monthly repayments than childless borrowers.

Banks and building societies have reduced maximum loan sizes for families because of new laws governing “responsible lending” that kicked in on January 1.

Now, instead of each lender estimating how much it will cost to bring up children or ignoring children altogether most use a universal formula based on the Henderson Poverty Line, a standardised guide to the modern cost of living.

The result is that the number of children a family has radically reduces borrowing capacity.

Mortgage insurer Genworth provides a guide to mortgage brokers of the biggest loans that should be offered, based on the HPL.

It shows that a couple with an income of $60,000 applying for a home loan at 8.5 per cent, and who have no children, could qualify for a maximum loan of $280,000.

These amounts do not take into account family tax benefit payments, which can average about $4000 a year per child and which lenders generally add to an applicant’s income.

Once the tax benefit is factored in, Genworth’s maximum advised loan ranges from $280,000 for a couple with no children to $229,000 for a family with four kids almost 20 per cent less than a childless couple.

Is this new? I am sure that dependents were always factored into mortgage limits.

So is the legislation actually holding back older people from taking on an ew mortgage? Are the lenders actually “slashing” the amount they are lending? Or are vested interests just talking their books and rolling out the usual anti-government lobbying ?

The fact that the brokers and real estate agents are grumbling suggests it is having some effect, but the jury is still out until we get some actual lending data to validate the claims. However this could  help explain the slow start to the Real Estate year.

The weekend’s 48 per cent auction clearance rate has done nothing to assuage the nervous anticipation about the direction of the residential property market this year.

It was well below last year’s opening weekend figure of 68 per cent, and puts this month in line for its weakest result since 2005.

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  1. I for one am very interested to see how these new laws impact on my situation.

    Recently my wife and I went to the CBA for a home loan and were told we could borrow upwards of $600,000, based on our combined (no kids) income of $110,000. Now we have one child and back to one income of $70,000….I wonder how much they are willing to lend us now?

    I am sure there are a lot of young families are in the same situation. At this point in time, how is it that any of us could afford even the most modest of houses? If we are not buying them…who is?

  2. “But Paul Ryan, a founder of Wizard Home Loans and now director of non-bank lender Intouch Home Loans, says the new system overlooks the fact that childless couples often have expensive lifestyles, while families may be more careful with cash.”

    He seems to overlook childless couples can easily reign in their expenses.

  3. Wow, you were right about the NCCP laws cutting out the bottom of the market! It’s sad , very sad to read what you quote in the article and the one about foreign investors being sucked into our always-doubling property market.

    All I can say is that one could insert those industry quotes regarding NCCP into a mock/satire article and they’d be funny without any modification. It’s Republican style rhetoric lol.

    The fact they are able to openly complain using such ridiculous reasoning proves, in my opinion, that they are panicking and that this new legislation could be the prick, that coincides with other factors to begin the massive correction we so badly need.

    These laws are clearly more than a nuisance.

  4. Hmmm… In the US they reigned in sub prime lending a bit, but only when it was far too late and the market had already turned. Of course the property bulls over there used this as evidence for a stable market just as the foundations were crumbling beneath them…

    Honestly, the more I look at the timeline of the US downturn the more similarities I find to our present situation. Our terms of trade miracle, FHOB and a stimulus that was more effective than the US one just seems to have delayed an inevitible correction that began in 2008.

    If the US timeline is anything to go by we should know in about 12 months if this is a single digit percentage correction (or “softening” as the spruikers like to call it) or if we’re in years of negative equity hell and bank bailouts. I’m still betting on the former, but savvy enough to know the latter is a possibility.

  5. Exceptionally good legislation.

    Older borrowers MUST be able to demonstrate FULL amortisation of a loan prior to retirement age.

    If you cannot ammortise a loan to zero irrespective of the future capital price either up or down then you should not be given the Credit.

    The younger generations do not want to be saddled with intergenerational debt transmitted directly (speculatation for capital gain) or indirectly (via capital loss) from older members of the community who want to speculate on unknowable capital gain/loss credit fulled ponzi schemes.

    If an assets income + credit ammortisation does not add up to positive income then your a ponzi credit speculator and should not be given credit…. Period

  6. I posted on this before on the old site regarding the car industry. I can tell you that it has not had one ounce of effect (not that I can notice) other than to create pointless paperwork that most people don’t even do until settlement (this is my biggest issue with these laws, in my area they do nothing but give our biggest competitors an advantage which should never happen). Actually, last month I had my biggest month yet and I deal predominantly with consumers (the rest of the office did pretty well also).

    Car/Business Equipment lenders were ALWAYS concerned with EVERYONE’S ability to repay the loan even before these laws were pushed through making my client files bigger than they needed to be.

    But, as you said, due to the depreciating nature of the assets I deal with this would have a built in shock absorber that housing doesn’t have. I can see why people in the housing industry might be feeling more of an effect, but at the same time, capacity guidelines haven’t changed. Lenders can still lend right down to the Henderson poverty line. As such, lending limits will still be dictated by interest rates.

    So yes, this would definitely affect the ability of older people to get a loan for a home for the reasons stated. But the easy solution is for them to set up an ABN and purchase an ‘investment property’ get a letter from an accountant stating as much, rent it for at least a year then move in when you want to. Viola, consumer credit laws are irrelevant because it’s a ‘commercial’ purchase and we are back to square one. Once again, it creates nothing but needless paperwork and piss farting around.

    If you really want to stop excessive lending you have to change capacity guidelines. Perhaps a solution would be to allow borrowers to borrow down to the henderson poverty line, BUT the loan repayments for capacity are based on a rate 5-10% above what they are today. What do you think?