Labor set to reward criminal mortgage brokers

The housing panic has set in for the incoming government, via the AFR:

Labor will outbid the Coalition on banks today by promising a vastly more generous compensation scheme for victims of financial service wrongdoing, including payments of up to $2 million for individuals and small businesses.

…It will announce the lender will pay an upfront fee which is 1.1 per cent of the loan. However, the 1.1 per cent will be confined to the draw down amount, or proportion of the loan needed buy a house. Mortgage brokers sometimes encourage people to borrow more than they need so they can, for example, buy a new car as well. This ensures the broker gets a bigger fee.

The 1.1 per cent is twice the 0.54 per cent currently charged for an upfront fee and compensates up for the abolition of trail commissions, another Hayne recommendation which both sides support.

That is pretty bloody stupid. Not only has Labor now left the twisted incentive to lend as much as possible (as opposed to what is prudent) in place, it has ensured that the wealth effects from doing so no longer flow to the real economy.

Lets just remind ourselves once more that brokers are the core of the problem in the financial system, creating diffused responsibility in the lender and ravaging the interests of the borrower as brokers lead the charge lower in leading standards, via UBS research:

Labor does not want negative gearing reforms derailed by a broker crunch so let the criminality flourish!

Comments

  1. Well fvck this job. I’m quitting and becoming a mortgage broker.

    Economics are great. Sell 100 loans – upfront commissions worth 1.1 houses. Government-guaranteed.

    Sweet.

  2. I think these things are being done with an eye to heading off large scale class actions against the banks. It says to people who have been ripped off, don’t join the class action, we will give you compo.

    Large scale class action against the banks will be bad for ‘confidence’ and ‘financial stability’ so Bowen wants to prevent them. Remember, Bowen is part of the problem.

  3. robert2013MEMBER

    What I want to see is people going to jail. Those who are satisfied with a compensation scheme are probably those who cannot see beyond their own noses. The future demands better justice than that.

    • Bah! Jail is for light violations… There is no justice like the justice served from the height of a lamp post.

    • You don’t have an RC if you are going to send people to gaol. You have a criminal investigation followed by trials.
      PEOPLE ARENT GOING TO GAOL OVER THIS.
      When will you all realise this.

  4. “Lets just remind ourselves once more that brokers are the core of the problem in the financial system, ”

    I’m not sure its so simple. ALP might have seen through this plot, devised as it was by the big banks, to put an end to competition. The issue of overlending and failing to verify can be solved by making sure it is the bank that is accountable for this, not the broker.

    • If the government wanted more competition, they wouldn’t have let the big four gobble up all the mid tier lenders/banks several years ago. The idea that brokers bring competition is misguided imo, anyone can look up a comparison sheet and tell someone to go to lender xyz because they’re cheaper.

      Information is abundant in the digital age now, the problem is the number of lenders out there is greatly reduced compared to what it used to be.

      Also we have too much lending/credit flooding our system, its out of hand and this is why lending standards keep dropping, because we’ve exhausted the good credit worthy borrowers a long time ago.

      • Smaller lenders don’t have the ability to compete wrt branch network, advertising presence. I wouldn’t trust any solution proposed by the big banks, suspect Labor has similar instincts.

  5. Correct me if I am wrong, but don’t banks still ultimately approve a broker originated mortgage? Brokers might source the customer, do the paperwork, and submit the forms – but assessing whether or not the loan is “prudent” is still the responsibility of the bank. This would presumably involve actually checking whether the information submitted in the form is factual or not.
    In any respect, open banking will prevent most of the liar loans getting through.

  6. Are governments actually permitted to set the percentage amount of any commissions? Surely this would have to be a discussion between brokers and lenders and not something that is legislated.

    We know that not a trail commission is not always paid in full for a variety of reasons, so if this arrangement to bulk up upfront commissions is passed, then the natural expectation is for banks to lower the loan amounts approved to reduce commission costs. They may also use it as a reason to raise mortgage rates to pass on the costs to borrowers.

    Either way, by putting more costs on the banks this should limit credit continuing the current downturn.

  7. The banks are very much complicit in the issues with mortgage brokers. They’ve used the broker channel (and the incentive of juicy commissions) to not just outsource part of the sales and acquisition processes, but to loosen lending standards to a greater extent than they can through internal channels. This allows the bank to write bigger loans and/or access an additional segment of marginal borrowers.

    So, we can:
    1) reform broker commissions to reduce the incentive for brokers to push bigger, inappropriate or fraudulent loan applications
    2) (en)force banks to undertake all the serviceability and responsible lending compliance, separate or additionally to the broker (as suggested by Kiwikaryn, Dan et al.)

    Under either approach, the broker channel becomes a lot less useful and lucrative for the banks. It will no longer help the banks access bigger, additional loans; it will just be about finding the customer a suitable loan product and helping them complete the application process. The brokers will tell you this is what they do, but such a service is worth a couple of hundred bucks, not 1-2% of the loan amount.

    If the system can’t justify paying the hefty commissions, the broker network will disappear. And that won’t be a bad thing.

    • Precisely, the banks used the brokers to push out sub prime loans. I think we need to go back to the system where the broker is an actual employee of the bank you’re applying a loan for. The outsourcing allows corruption to take hold.

      Totally agree on the service cost, problem is right now we have a lot of squealing brokers who know the gravy train has ended.

  8. Vote for Labor if your stupid

    LOOOOOOOL Wait till Shorte n Dumb does a backflip on negative gearing reforms, then you morons might learn a thing or 2 about Labor