Responsible mortgage lending is dead

Two months ago, ASIC narrowly lost its responsible lending case against Westpac in the Federal Court.

ASIC’s case against Westpac went all the way back to 2017, when it commenced proceedings alleging that between 2011 and 2015 Westpac failed to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts.

ASIC argued that Westpac was overly reliant on the Household Expenditure Measure to assess loan applicants’ capacity to meet their repayment obligations. As such, it did not make adequate inquiries about applicants’ circumstances. ASIC claimed that in so doing, Westpac breached the responsible lending provisions of the National Consumer Credit Protection Act.

CHOICE and Financial Counselling Australia slammed the Federal Court’s decision in favour of Westpac, saying via a statement:

“The Full Federal Court decision suggests that banks do not have to have regard to people’s actual expenses when they lend. Worse, the court found that the law as it stands leaves its open for the lender to decide what inquiries it will make.”

ASIC abandoned the case against Westpac altogether last month after the heads of the Reserve Bank of Australia (RBA) and Treasury both privately warned it would exacerbate economic uncertainty caused by COVID-19.

RBA Governor, Phil Lowe, then complained to this month’s Standing Committee on Economics that mortgage standards are too strict:

“The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad, because the bank didn’t understand the customer; if it had done proper due diligence—this is the mindset of some—the bank would never have made the loan. So some of the banks have had this mindset, ‘Well, we can’t make loans that go bad'”.

Accordingly, Australia’s regulators have effectively given the greenlight for banks to engage in predatory lending – explicitly against the findings of last year’s Hayne banking royal commission.

We are already witnessing the fallout, with banks extending new mortgages to Australians on JobKeeper:

Despite many people taking significant hits to their income during the COVID-19 pandemic, banks are still accepting and green lighting applicants who have suffered significant income losses…

Using a big four bank serviceability calculator, someone on JobKeeper could borrow around $250,000 for a home loan.

This assumes annual income of $39,000, monthly living expenses of $1400, interest rate of 2.79 per cent, 30-year loan, no other debts or credit cards.

Mortgage Choice broker Tim Leonard said many lenders had been “very supportive” of customers receiving JobKeeper payments and were approving loans…

Financial Counselling Australia’s chief executive officer Fiona Guthrie said… “I think we should be worried about responsible lending after the Federal Court decision as it could lead to laxer lending standards.”

We are only 18 months out from the final report from the Hayne royal commission and responsible mortgage lending is already dead.

Leith van Onselen
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Comments

  1. last sentence above “We are only 18 months out from the final report from the Hayne royal commission”
    Alas, Its the 18 months curse 🤫

  2. Reus's largeMEMBER

    MPLOL !

    This is why I was critical of your continued calls for lower interest rates, there was never going to be MP, I have been proved right all along in spite of the previous bans !

      • About the fact that the reality is that IR will be lowered but no MP will come.
        MB is constantly wrong about advocating for policies that require strong controls but knowing that the strong controls will never be implemented. Yet they keep supporting these policies. It is half way between naive and plain annoying.

        • Tend to agree with that sentiment.

          Each article needs 3 parts
          1) deconstruction of the issue
          2) evaluation of the appropriate response
          3) the anticipated actual response

          To keep banging on about 2) without regard for 3) is worse than annoying and perpetuates the myth that these ideals will magically stick/defy gravity and good ideas will triumph. It won’t, and they won’t. That’s life.

  3. Let them make bad loans — it’ll just make the denouement even worse than it otherwise would. Look what happened during the GFC – NINJA loans, ARMs etc. Worse the loans, bigger the crash.

    As for people getting mortgages on JK – how stupid are these people. But they’re having a go, which means they must be prepared for it all to go pear-shaped. Good life lesson.

    • FUDINTHENUDMEMBER

      Pull out all the super for a deposit, get a loan on unemployment payments, and buy into the biggest asset bubble in history! What could go wrong?

  4. The article, doesn’t say people on JK are getting mortgages, just that if you put a JK income ($750pw) into one of the bank’s online calculator (and make some other assumptions) you could borrow an amount in theory (only $250k as it turns out which really doesn’t get you much anyway).

    Such a person would still need to get approval from the bank (which I would expect would be unlikely if the borrower was on JK).

    • “Mortgage Choice broker Tim Leonard said many lenders had been “very supportive” of customers receiving JobKeeper payments and were approving loans…”

      • Fair enough although there are. a lot of weasel words in that statement from the broker.

        I’ve just sent an email to a mortgage broker mate of mine and to another mate who works in mortgage lending in a bank to get their take on it.

        • Quick update – the banker friend said they effectively look through the JK income and see if the person really has a job or not. IF it is likely that there is a job there but the borrower is currently on JK then they will reduce the amount to be borrowed.

          So, probably wouldn’t lend to someone in hospitality or tourism even if they were getting JK but would if they were in say FIRE. I didn’t ask about retail.

    • Using a big four bank serviceability calculator, someone on JobKeeper could borrow around $250,000 for a home loan.

      This assumes annual income of $39,000, monthly living expenses of $1400, interest rate of 2.79 per cent, 30-year loan, no other debts or credit cards.

      Monthly expenses of $1,400? So rent, food, transport? How on earth do you manage to only spend $1,400 P/month?

      • These things are theatre. None of them are meant to be real. They are artifacts of the banks needing to make continually bigger loans.

  5. Well, it’s tricky, tricky, tricky… if the banks withhold lending from those that want a go then they don’t get a go. Some degree of personal responsibility should be assumed when asking the bank to borrow money. Some degree of predation by the banks is going to happen as part of competition between the banks looking to expand their loan book. Now if you bite off more than you can chew then you you get a tough life lesson and pay the price for your poor decision making and the bank may even take a hit (unlikely though). If one bank goes a little too predatory and too many of these loans start to unwind then the bank along with the irresponsible borrowers will both take a bath (and shareholders too when they should have been holding the bank to account already for poor lending practices) and all parties learn tough life lessons. However, if all banks make the same poor lending decisions and all the punters leverage themselves out the wahzoo then house prices just keep going up, banks, shareholders and punters all win! Which is great until we’re hit with an exogenous shock that threatens the ponzi; but even then it’s not problem because it’s “systemic” and the RBA or the government will engineer a rescue package because “we’re all in this together”.

    Moral of the story is to borrow as much as you can with the greatest leverage the lender will give you and then hang on for dear life because it’s the only way to get ahead In this rigged Ponzi scheme that everyone is playing and is in everyone’s interest (every debt serf, banker and politician at least). Everyone wants this great game to continue from the top of government, to the banks, down to the borrower (but remember to exclude lowly depositors). Everyone’s got your back and everyone wants you to win. You’d have to do something pretty stoopid to mess up such a simple plan and if you do; all you need to do is get a better job to fix thing.

    • The RBA and the gov’t both showed their hand during the GFC, they can’t just un-show their hand.
      What we have today is the consequence of the big4 (and more importantly their lenders) knowing that the government is 100% guaranteeing Aussie big 4 bank loans. This fact alone explains the actions of our biggest banks over the last decade. They care about mortgage market share, they care about population ponzi, they care about a rising tide lifting all boats (it’s the no work solution that makes their loan book look good).
      The game will continue until it simply can’t take another step. The game will be over when someone else (someone external) takes the ball away and chances are they won’t be acting responsibly they’ll just take the ball regardless of what’s in play.
      What more can you say then that this is the game Aussies choose to play, its a game that has obvious consequences which all good Aussies choose to ignore.
      Isn’t it weird that we’ve created the housing game that is irresponsible to play collectively yet simultaneously irresponsibly to not play individually. That about says it all.

      • Indeed, indeed.

        I’m yet to meet anybody who wants to lower the value of housing to more affordable levels.

    • darklydrawlMEMBER

      At a glance it looks like a ‘Peer to Peer’ lending set up. It might be fine (with the usual caveats re; risk and reward), but I would certainly do my homework before diving in.

    • I’ve had some money invested with them for about 2 years. Haven’t had any problems (yet). The current economic goings on has me a little nervous but my fingers are crossed. And yep, it’s another variation of peer to peer (I’ve played in several of these now). Can tell you about many of the popular ones. There is one in particular in which I got burned and other that don’t make any sense and some just seem like playing expensive slot machines.

        • Whilst not an endorsement, Balmain is the only one I’m still with and I’ve played around in 3 or 4 other p2p platforms, but not too seriously and I got burned in one.

          • Thanks, I looked at these platforms as an option away from bank deposits. But this was a couple of years ago. I probably wouldn’t want to be lending folks money right now. Risk of not being paid back seems higher than ever.

  6. working class hamMEMBER

    As long as the higher risk loans are priced accordingly. Significantly higher rates, larger deposits reqd, LMI.

  7. reusachtigeMEMBER

    Lending should never be about what is responsible. It should always be about what is maximal.

  8. pfh007.comMEMBER

    Misallocating capital to residential housing is a feature not a bug of Australian Banking and is explicitly endorsed by the banking regulators and the government as otherwise they would stop it.

    Of course we could fundamentally reform the method by which capital is allocated in Australia to productive purposes but that would involve doing something rather than fiddling around the edges.

    https://theglass-pyramid.com/2020/08/20/investment-manager-special-edition-myrba-superior-for-productive-capital-allocation/

    “.. Three decades of misallocating capital, including the proceeds of the once in several lifetimes mining boom, demonstrates that Australia desperately needs real competition in the allocation of capital. The strangle hold and special privileges of the banks in relation to capital allocation must be removed for the simple reason that they have failed to deliver over an extended period…”

  9. Australian banks acting true to form.
    But seriously, what do you expect? They have to keep lending because if house prices crater they all go bankrupt given their concentration in residential mortgages. Also, explicit backing by RBA means they don’t need to act like commercial organizations would…

    • Exactly!

      Within the logic of the current structure of the Australian Banking and monetary system the economy is held hostage.

      “Stop misallocating capital to land speculation and the economy gets it”

      The only way to reform this hopeless state of affairs is to remove the privileges of the banks with regard to capital allocation and open it up to competition.

      That will ensure capital keeps flowing to productive purposes while the supply of capital for asset price pumping dries up.

      The obsession with keeping 4 big bloated banks as the dominate method of capital allocation in the economy is nuts.

      Except to the banking industry parasites of course.

      • Jumping jack flash

        Banks have the world hostage. Everyone is addicted to their debt. There’s not much other alternative at this stage of the game.

  10. Stewie GriffinMEMBER

    EZFKA

    Responsible lending is something only societies think or care about, in the Economic Zone Formally Known as Australia, the only thing that matters is the economy and that it keeps growing.

    Atomised consumers (residents) of the economic zone are responsible for themselves and no one else.

    This is who we are now.

    • darklydrawlMEMBER

      It’s even more ‘circular’ that that. I have been amazed at the number of folks who are currently in financial trouble openly admit that they did no planning or research themselves and assumed that if the bank would lend them $X then they must be able to afford it. This results in the absurd situation where the customer says “I thought I could afford it because the bank offered me that amount”. The bank says “We assumed the customer could afford it as they accepted our terms and conditions”. Neither take responsibility or are accountable.

      • I’m a bit lost here.
        The house buyer is supplying on 10% of the money to buy a house while the bank is supplying 90%. this makes it clear who needs to be the responsible party. Most of our average punters would be better off if the housing market crashes and they’re forced to declare bankruptcy but until it does they’re better off being in the game.
        It’s not actually all that hard to understand.

        • It’s all about the fallout when it all goes pear-shaped, even though the bank is holding 90%, its the borrower who is left without a roof over their families head. I’d say given that result there’s a huge case for the borrower to take al little more responsibility in the transaction. It’s like being in the right on the road, you may be in the right but if the other party’s a truck, that’ll be the words on the headstone!

          • Banks foreclosing is at most a bottom 10% problem because foreclosure assumes that there’s a bigger idiot just waiting to snap up this property at 10% discount. Banks won’t foreclose if there’s no buyer, they’ll extend and pretend, can kick and beg the government before they put 25% of the population out on the street.
            So just make sure you’re not the bottom 10% and you’re safe.

        • darklydrawlMEMBER

          I totally agree with you, but it doesn’t seem to work that way when the manure hits the blade. There is a lot of finger pointing and blame shifting. The banks should be a lot more careful about who and how they lend money for these things and actually verify the customer can afford the repayments (practically and not just in a theoretical optimal ideal world), but that crimps profits and bonuses. Sadly it seems only an epic crash will reset the system.

          • Stewie GriffinMEMBER

            With unsound money the issue is not necessarily the repayment of principal, that will come eventually through foreclosure as Ulrike Meinhof has pointed out – in which case they’re not likely to lose much in notional terms anyhow because the asset will have appreciated enough through monetary debasement (and the greater fool theory is always available to step in and save them).

            The issue with predatory lending as encouraged within EZFKA is capturing a flow of wealth as it is generated and passes through the economy – it is the SERVICING of the interest that is important, the repayment of the debt is secondary. All the metrics that matter in EZFKA are in regards to the flow within the economy, Profit, Profitability, ROE – these are all the metrics that matter because these are the metrics that the elites skimming from the top are assessed and rewarded on.

            As MMT adherents will always point out, the economy and its budget is not like a household budget or even life cycle, debt doesn’t EVER need to be repaid, it is the flow within the economy that is important. Predatory lending is about capturing a flow of the productive endeavors of our society and ensuring those flows NEVER stop being serviced.

            It is the servicing of enslaving debts that matter, not their repayment.

  11. Hill Billy 55MEMBER

    We’re going gangbusters here in sunny Queensland with the latest week producing 1026 sales of residences. This is the highest number since the pre Christmas extravaganza that saw over 1300 residences change hands in a single week. To put that number in context, in the past week there were 887 house sales in Victoria and 1456 sales in New South Wales. Other jurisdictions, SA, 302; WA, 453; NT, 17; ACT, 75 and Tas. 172.
    So many are being sucked into the vortex of (alleged) limited supply that prices are actually finally increasing in the Brisbane area according to corelogic.
    When will the people open their eyes and see the amount of building still going on here, the number of For Sale signs down every street, the sheer lunacy of the ponzi that we are living?

    • darklydrawlMEMBER

      I recokn that because thousands of locked down Melbournians, fed up with the cold and wet, are making plans to escape. I personally know a few families that are seriously considering moving north and have factored the additional logistics and quarantine costs into the moving budget. Melbourne risks returning to it’s ‘rust bucket’ status of the early 90’s post the pyramid building society collapase when more people left than arrived.

      • Open the immigration gates, they don’t care how ‘livable’ Melb is, if they can get a cheap place to live.

    • Jumping jack flash

      I’m not surprised at all because I suspect these are using recent super withdrawals as a deposit.

      There will be a 6 month lag because I believe the banks stop asking questions about where money came from after 6 months, and treat it all as “savings”.

  12. Jumping jack flash

    Very good. The banks are finally trusting their own model, but time will tell whether the debt growth gets back to where it needs to be to prevent total collapse.

    Get the debt out there. There’s no risk whatsoever if the banks simply give out the required amounts of debt to make it all work.

    Borrow whatever s required to give the seller enough to repay their remaining debt, give the bank their interest, and a bit of expected capital gains. Easy!

    The only thing standing in the way of that is the buyer’s debt eligibility. So fix it so it works.

    “… it would exacerbate economic uncertainty caused by COVID-19.”

    Indeed it would.