Pre-GFC low-doc frenzy

The Australian this morning continues its excellent coverage of Australia’s buried sub-prime scandal:

A NATIONAL body of finance brokers claims risky low-documentation lending was “out of control” during the boom years, with the practice driven by aggressive lenders chasing easy profits.

Finance Brokers Association of Australia national president Peter White said many brokers had engaged in “stupid” high-risk low-doc lending, but that they were only following the credit standards set by lenders, which had plummeted in the lead-up to the financial crisis.

Finance brokers, who were at the front line of many of the practices, have claimed the banks were pushing products on the industry to sell.

…Denise Brailey of the Banking and Finance Consumer Support Association, who blew the whistle on the low-doc lending scandal, said it had been the lenders, rather than brokers, who had encouraged most of the improper lending practices during the boom years.

…Mr White, a mortgage broker of 34 years who was involved in the creation of one of the nation’s first low-doc loan products, said the expansion of those loans beyond their intended purpose as a niche lending product for small numbers of self-employed was a “huge mistake”.

“Things were very heated and aggressive into the financial crisis and low-doc loans were being written left and centre,” Mr White said.

“In my mind it seemed to be out of control. Low-doc loans were the easiest way to go, but you can’t just blame the mortgage brokers because they can only operate as per the lender’s rules”.

 

David Llewellyn-Smith

Comments

  1. This is why I won’t buy a home until the market crashes. Because there could be up to 100,000 families that maybe able to walk out on their loans if its found that their loan applications have been altered, and so far by what I know all the applications they have checked (400 or so) have been found to be fraudulently altered. This would leave the banks with the home and debt. A number of these people as far as I know are not even paying their mortgage now, sitting in limbo and it feels like the banks don’t want to push the issue because its like opening a can of worms.

    It’s impossible for Australia to escape this problem, and it should play out just like the US did. Also, the government covers the big4 but for how long. I am going to cancel my account and move my money to a bank that is not exposed like these banks are.

    But what bank is not as exposed, anyone have any ideas, how about Kiwibank ?

    Also, as more people like me start to pull funds as the story unfolds the banks will have less to play with.

    What is the debt for mortgages in our banking system now, 1 or 1.5 Trillion. It is bad.

    • I would like to also know what knock on affect this will have in NZ as the big4 are the major players over there as well and if its been happening in Australia then its a sure bet that NZ has a sub-prime problem.

    • Just be aware that Kiwibank is not Government owned, as many believe. It is owned by the New Zealand Post via its Kiwi Group Holdings Ltd, which inturn is a Government State Owned Enterpris. And where did they get their entry market share from? Undercutting the Aussie banks on…..home lending.

      • Yes, knew that they were owned by NZ Post, but if they are no good because they are also exposed to large debt then what bank is good, what bank would be considered safe that does not have the large exposure that the big 4 and Kiwibank have, ME bank, a credit union, who ?

        I was even thinking of just turning cash into gold, and not gold in shares, physical gold.

        I don’t believe for a second this world is on track for recovery, in fact I just find governments lie and twist figures that are now so twisted that they don’t even line up with real fundamentals anymore.

        • I have been predicting ever since Jamditin (to the taxpayers – Jim Anderton) forced the creation of Kiwibank, that one day it will cost the NZ taxpayer billions to rescue it. And nothing has made me more convinced I will be proved right, than its activities in the recent housing bubble era.

    • “It’s impossible for Australia to escape this problem, and it should play out just like the US did.”

      Bring it on. I recall that Citibank hit below $1 in 2008-2009 and caused a problem in DJIA because no stock below $1 warranted inclusion in the index. I am very well positioned for the crash, in fact I can hardly wait for it!

        • It’s playing out differently because there was a lower level of market penetration. There is a time and a place for assset lending, but it’s not suitable for every time and every place.

          • It’s playing out differently because there was a lower level of market penetration.

            Low level of market penetration, eh?

            In 2000, just 0.5 per cent of all loans written were low-doc or “no-doc” but by 2008 that figure had rocketed to almost 20 per cent of all loans written, despite those loans carrying significantly higher interest rates.

          • Yes, the mining boom did offer free clothes to the naked – banks, regulators, everybody…I actually saw David Gruen once argue that the run up in house rices anticipated the mining boom…now that’s faith in “the market”…

          • Certainly our strong economy helped insulate us.
            Was the US economy in trouble before the sub-prime crisis hit, or was the sub-prime crisis the trigger for a series of catastrophic events that brought down everything?

          • ” the long-term trend of de-industrialisation is at the root”

            In the USA – I would agree with that. Actually it’s more widespread than just the USA and I don’t know how nations will come to grips with that. The phase where China produces everything will eventually end, but that could take 50 years and the interim damage to economies will hurt several generations if something isn’t done to counter the trade imbalance.

          • In the context of a consumer purpose loan there is not really ever ‘a time and a place for asset lending.’ (if by that term you mean asset based lending) In my understanding a credit provider is required to properly satisfy itself of the consumer’s ability to repay without undue hardship. ‘Asset based lending’ is for this reason typically a red flag signalling unconscionable conduct by the credit provider.

          • rob barrattMEMBER

            Peter
            “There is a time and a place for asset lending” yes, but the real world is driven by Minsky economics. The perception that property prices were always going to rise, combined with the new wave of derivative speculation (C. K. Liu describes the psychology of banks and the Fed before the implosion perfectly in
            http://www.henryckliu.com/page212.html
            All caution was thrown to the winds in a feeding frenzy. I worked for Barclays bank at the time, I got into trouble for even mentioning the neccessity for compliance reporting on the project I was managing.

            And it will all play out again and again and again. Banksters and compliant politicians will never change. I agree with Dumpling, Australia’s debt burdon is still an unexploded mine, I’m a mug for Steve Keen’s graphs.

          • It is all about mining. China slumps and it is over. We saw this a few months ago when iron ore was $87 and for a few days Australian bank CDS decoupled from broader financial moves and began to spike.

            You can’t have a houses and holes economy without holes fulfilling the role of productive industry.

          • I actually saw David Gruen once argue that the run up in house rices anticipated the mining boom

            OMFG!

          • Grantor – just to clarify that point – when lending to retail clients the lender must verify capacity to repay under the regulators guidelines, but business clients are not the same, and in the case of startups it’s always an asset lend with as much done as possible to ensure the business will be viable, but the reality is that most new business’s aren’t viable in the long term.
            Lending isn’t only about someone buying a car or a house for their own use.

          • ” the long-term trend of de-industrialisation is at the root”

            Boeing, Dell, Honeywell, Catapillar, GE, Ford, Coke, Pepsi, MacDonald, among other bunches, are all great American enterprises. If you add relatively new comers of Microsoft, Apple, Google, Facebook, etc., it constitutes tremendous depth.

            Of course, some went to the wall. Kodak comes to my mind.

          • Basically the nature of the “industry” is changing all the time. Some make successful adjustments. Some fail to do so.

            But I will never bet against the regenerative capacity of American capitalism.

          • Thanks Peter, yeah it’s agreed that not all loans are consumer loans. Of course, your comment was made in the context of a discussion about lo-doc home loans which is largely an issue in consumer finance. (and ticking the ‘business purposes’ box on a loan application does not make a loan a business loan.)

          • @ Mav: Remember in the GFC the big 4 banks swearing black and blue that we had no liar loans, no NINJAs and all players in all sectors were healthy pink.

            How long can this charade go on?

            Don’t Buy Now!

          • @rob barratt,

            “All caution was thrown to the winds in a feeding frenzy. I worked for Barclays bank at the time, I got into trouble for even mentioning the neccessity for compliance reporting on the project I was managing.”

            Sounds like a classic catch 22 situation. I heard quite a few similar stories as yours before. It is hard to imagine that Barclays is an exception rather than the norm. Nobody should be surprised if the Big 4 banks have balance sheets as precarious as that of Citi when it almost went belly up. Numbers can be easily fudged or “massaged”, as Greece showed.

    • “A number of these people as far as I know are not even paying their mortgage now, sitting in limbo and it feels like the banks don’t want to push the issue because its like opening a can of worms.”

      Is not this the clear evidence of collusion of oligopoly? Now it appears that they finally realized their monumental folly, a sensible thing to do is to cut the loss and get out. If one of the banks can get out first ahead of the others….

      • Great comments Grantor.
        Home loans should only be made with 25% deposit & repayments not exceeding 25-30% of after tax income.
        This worked well in ’50s’ & ’60s’. Would also help reduce house prices to more realistic levels.

  2. I remember St George was happy to give me over a million bucks in the mid-noughties after filling out a one page form.

    • I never went ahead with the loan BTW, partly because I was so shocked at how easy it was to get the money.

        • reusachtigeMEMBER

          Yes, but how many poor suckers didn’t come to their senses and drunk the cool-aid instead? The majority of course.

          • It is beyond my comprehension. I will probably never understand why anybody wants to borrow such a gigantic sum for …. what exactly?

            Not that I need to or want to understand …

          • reusachtigeMEMBER

            It doesn’t matter why, someone was offering loads of money for a much bigger and better house. Sweet!

          • I was upgrading to a new property and from my initial mortgage of 270K. We contacted a broker through a friend of a friend and he told us that because we had such solid employment that we were approved for up to 800K. I’m like WTF. Our combined income at the time was 130K!!!!

          • who knows. It worked for a couple of decades, didn’t it. So many “successful” stories out there.

            despite my warnings, my friend is well and truly on his way to a happy ending he always dreamt about.

      • 2006 was the last time I looked at buying property. I asked the local Big 4 affiliate,”If I put up $X, how much will you lend me for investment property?” The answer was $X time 4.”I see”, I said,”But I actually think interest rates are going to fall from here so can I borrow that $X times 4 and stick it on deposit with you for 5 years, guaranteed by a pledge over my$X?” Some discussion ensued in the back room. The answer was “No. We can lend you 80% of $X, as we need to keep our LVR in line as we would with a house” So risk on property was okay; but risk on cash wasn’t!

        • You actually can borrow and use cash as security Janet, but when you talk to bank staff who only know how to write home loans then you are going through the wrong channel.

          I don’t see any point in the exercise as the interest that you receive will be less than the interest that you will pay, but technically it’s possible.

          • It was a yield curve play, Peter. Bank deposit rates in NZ were about 8.5% for 5 years ( finance companies, like Elders Finance, were at 11% but look what happened to many of them!) and I saw floating rates falling; they have. It would have been a nice little earner if I’d perused it, but I got frustrated by those store staff you mention. That 5 years has come and gone all to quickly, but the play is still on, today. It’s as viable today, even if many don’t see it, as it was then!

          • It’s the issue of security Janet – if a banks lends against cash they must control that cash to have effective security, and they will always lend to you at a margin above what they pay you in interest, hence it’s not a good play. If you had alternate security to offer then you could make that play.
            Be careful though, many people have lost their shirts chasing high yields.

          • I’m always careful, Peter! That’s why I sold all my assets in ’08 – all of ’em and stuck the loot in the bank. And as you know I see a reverse play coming up at some stage soon – borrow long and lend short. But not just yet… and yes… shirts can be expensive; especially when one didn’t see Saddam Hussein stormin’ over the Kuwaiti border. But life goes on.

        • So…. what happens when the LVR of an existing mortgage touches 80% because of “lower valuation”? A margin call perhaps?

        • rob barrattMEMBER

          You should have borrowed UK sterling and bought AUSD in a carry trade Janet. You’d be in the Bahamas now…

      • Me too Lorax, back in 2003 with St George I actually had a million against IPs.
        Then I got presents from the bank such as a bottle of desert wine and then a Monopoly game… I thought shizen if a bank is sending me pressies then i am in trouble…so i sold of some property and brought down the borrowings.
        Beware of banksters bearing gifts.

  3. Jumping jack flash

    Sounds like the mining boom papered over the cracks to some degree.

    It will be interesting to see how this risky debt can continue to be serviced if there is reduced money flowing into the country and into people’s pockets as wages.

    • >Sounds like the mining boom papered over the cracks to some degree.

      Some degree ? I would say it papered over the whole economic structure.

      Once the ToT hits GDP (next Qtr ?) I suspect the gnashing of teeth will grow much louder.

      • Once the ToT hits GDP (next Qtr ?) I suspect the gnashing of teeth will grow much louder.

        Holding thumbs here! 😈

      • With a bit (a lot?) of luck, a declining dollar will offset some of the ToT effect of declining iron ore and coal $US prices. Can’t do anything about the volumes, though.

    • That and having the three wise monkeys (APRA, ASIC and the RBA)declare there’s nothing to see here, move on and also state that macroprudential regulations are not required because the baking industry is well regulated. What could possibly go wrong?

  4. No more, or major, asset price falls and then theres no problem.

    Thats how the RBA is thinking now isnt it? Less mining, more houses… again!

    • > Thats how the RBA is thinking now isnt it? Less mining, more houses… again!

      But does more housing protect existing debtors’ asset values ? Indirectly via economic growth yes, but possible not directly. If it doesn’t then the issue remains.

    • Thanks Mitch

      Because of an opinion that there will be a successful IPO next year after the failure this year, then S&P are not actually downgrading.

      The only thing not damaging Genworth atm is that mostly the low doc scandals wont touch them as they will simply deny claims and leave the loss in the hands of the lenders. Although I’m betting they make exceptions for Mega Bank

    • S&P revised the outlook to negative due to the US Life Co being put on negative outlook. This forces a review of all exposures (weakest link approach). Nearly all affected RMBS were affirmed at AAA. Those that weren’t were upgraded.

  5. I can’t go into a bank nowadays to deposit funds without being pitched on a mortgage. It’s relentless

    • I constantly receive “invitation to increase your credit limit” on my credit card without ever walking into one!

        • It is I worked in WPAC a short while back and they were figuring out ways to implement this but still take every opportunity to ask the customer if they were “sure they didnt want to receive credit increase offers”

  6. General Disarray

    It’s funny I don’t see a word written by the guys who blame the GFC on affordable housing polices in the US.

    The same dodgy lending practices were starting to happen here – we were just behind the curve.

    Could it be that greed might be the problem?

    • “The same dodgy lending practices were starting to happen here – we were just behind the curve.”

      Exactly. My sense is that as the number of “greater fools” dwindles, the banks are under increasing pressure to find revenue growth elsewhere. They will go a long way to invent ever inventive, new “products” to justify issuance of new credit, and by doing so place themselves to ever more precarious positions. Eventually they will reach a point that they can no longer keep doing it, but it will take some time.

      Is this process driven by greed? Absolutely!

      Predictable? You bet!!

      • These problems have only ever mounted up into a crisis because inelastic “supply” and land rationing by local government forced the prices of developable land up into the stratosphere. Pretty much exactly the same market conditions applied all over the USA, but the clever hedge fund guys who were “shorting” mortgage backed securities focused all their activity on mortgages of Californian origin. Read “The Big Short” by Michael Lewis.

        There was little money to be made in derivatives based on the mortgage markets relating to the 200 odd cities in the USA that never had a price bubble. Get this into your heads, everybody: the problem STARTS with the land supply. If it doesn’t start there, you don’t have any other problems; you don’t have “sub-prime”, you don’t have spruiking, you don’t have insane speculation, you don’t have irrational beliefs in a “new normal”, you don’t have endless political “solutions” like demand-side subsidies or mortgage “guarantees”, you don’t have wide boys adding layer upon layer of “gaming” to the system……..

        • I know about inelastic “supply” (restriction) causing the land bubble. That is why many cities in the US had negligible land inflation.

          But since we are already where we are, it pays to try to foresee what will happen next, here at home.

          BTW, Michael Lewis wrote “Moneyball”, too. I love it.

  7. This thread got far too skinny back nearer the start; but I badly want to throw in this observation.

    Maintaining a “new norm” of grossly inflated urban land prices is ultimately the means of its own destruction. Inflated urban land prices are a COST to every part of the economy that actually PRODUCES anything. They reduce urban productivity, they increase workforce cost pressures, they reduce discretionary spending (and this effect “compounds”) and they reduce economic competitiveness via several different mechanisms including interest rates and currency markets. Ultimately the whole economy has to “tank” BECAUSE of this millstone around its neck, and then what happens to the “median multiple 9+” house prices? Or the “ratio of the value of urban property to GDP” of well over 3, when Texas is more like 1.2?

    • You know the solution?

      Broad based land tax. If combined with appropriate tax cuts, it will force land owners to optimize their land use.

      • I strongly agree with land taxes, period. I do not believe that they are a “solution” to the land price inflation problem in the event of regulatory-induced racketeering. I say have “no limits”, and have “land taxes”.

        The economist Mason Gaffney (he is still alive and deserves to be famous) had it well worked out way back in 1964:

        http://www.masongaffney.org/publications/e3containment_policies.cv.pdf

        Notice how he describes that land taxes themselves have the effect that growth containment regulations are alleged to be enacted for. But land taxes keep the cost of land low and unlike blunt containment regulations, do not have unintended consequences, do not have vested interests pocketing fat unearned capital gains, and do not transfer wealth upwards from the poor and the young, to the “big property” interests at the top.

        The fact that urban growth containment advocates have virtually ALL not bothered to advocate land taxes even as a way of allegedly averting the consequences of their quota scheme inflation of land prices, shows them to be either so pig-ignorant about basic economics that they should not have the power they do, or worse still, it shows them to be corrupt and in alliance with the vested “big property” interests who make such a killing out of growth containment.

        Because the price of ALL land within a city is inflated in price by rationing at the fringe, and the price of land at the centre is dozens of times as high as the price at the fringe, guess which class of people has rational cause to secretly fund and support conservation and smart growth and agenda 21? Paul Cheshire and Edwin S. Mills, in their Introduction to the 1999 “Handbook of Urban Economics, Volume 3”, mention an estimate that the most expensive land (usually CBD land) in the most expensive growth-contained cities is 100,000 times more expensive than equivalent land in typical non-growth-constrained cities. It is not the advocates of “freedom to develop” who have a case to answer regarding whose pocket they are in, it is the advocates of constraint. The profits made by developers of Greenfield land under true conditions of “competitive land supply” (as in many US cities) are modest and honest. The capital gains made by “big property” through urban growth controls are massive and completely unearned.

        The millions of dollars in capital gains made by any ONE significant CBD property investor, is a potential source of funding for a LOT of smart growth and conservation activism; but consider that there are THOUSANDS of such investors. All the attention re vested interests is being focused the wrong way. There is almost no money to be made by anyone who is advocating free market competition in urban development; hence almost no-one IS advocating it.

  8. In what world is it possible for banks to receive interest free cash from the Fed which they then use to buy Govt bonds at up to 3%.

    With the Fed now buying $40B per month of this shit what impetus is there for banks to rein in lending standards. At least Canada and Singapore are implementing regulations to put a stop to low LVR/40 year mortgages, why dont the others follow suit…