Mortgage holidays will leave nasty hangover

Evans & Partners’ Matthew Wilson is particularly critical of allowing banks to treat frozen loans as performing until 31 March 2021. Wilson claims the decision to “amend, extend and pretend” is not just delaying the inevitable but also making the eventual hangover worse. He also believes repayment holidays have contributed the phenomenon of “ghosting”, whereby 20% of customers with deferred loans won’t respond to phone calls from their lender:

Mr Wilson says the decision to put loans into the deep freeze without qualification breaks a fundamental rule of banking, severing the all-important connection between the borrower and the lender.

“Borrowers have lost their repayment rhythm and credit departments have lost the important repayment signal. We believe that deferral schemes may end up being material policy error,” Mr Wilson said.

The CEO of the Australian Bankers Association, Anna Bligh, recently announced that banks would commence “the largest ever customer contact process in the industry’s history” as they attempt to contact around 400,000 customers that have deferred repayments on about $167 billion worth of mortgages.

The fact that around one-in-five of these borrowers – around 80,000 – are now ‘ghosting’ their banks is a worrying sign and suggests many borrowers are teetering on the financial brink and may be forced to sell.

When viewed alongside the mass withdrawal of emergency income support by early 2021 and the collapse in immigration, I am struggling to see how Australian property values will rebound materially in next year.

Unconventional Economist
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Comments

  1. happy valleyMEMBER

    The “partners in the ruse” – the banks, APRA, ASIC, RBA and the gubmint – have to keep the “ruse” a secret as long as possible – so, deferrals beyond March 2021 must surely be on the cards unless there is a miraculous recovery in employment and business circumstances? Only the finance brokers who have stuffed the willing banks with now NPLs are “home free” at this stage?

    • Not quite ‘home free’, they will forego their trailing commissions.
      I would be surprised if the banks did not have a ‘clause’ somewhere in their contracts with the brokers that too many bad loans and they’re toast?

      • “… they will forego their trailing commissions. ..”

        Would seem sensible but do you know this for sure?

        • I do know for sure that when the loan finishes that trailing commission stops. I’m assuming that it’s really when the loan is no longer producing revenue that it would define a stop.
          My logic is that if the banks aren’t getting any income why would they continue to pay broker commissions on an ongoing basis?
          That’s a lose lose for them, and that’s not the banks I know and love! :p

          • Agreed. Won’t be long then before the brokers start bleating! They won’t be getting the cash but it won’t stop them accruing the revenue. If there’s a wave of defaults though they’ll be writing those off PDQ. 😉

      • Brokers are being paid their full commission till March 21.

        From there

        “Trail won’t be paid to the broker while an account remains in default for 60 days or more.

        Some banks will cut trail if the loan is in default for 30 days but others will cut trail after 15 days in default.”

        So thats going to be it – if I were a mortgage broker I would be ringing any “ghosts”.

        .

  2. I don’t think it would controversial to suggest that the 20% of ghosters are those who are definitely r00ted, and that there’s another 30% of marginal borrowers who are still communicating with their banks, but have little to no hope of renewing their repayments, so the problem is likely a lot bigger than the 20% figure (which is huge and eye widening in itself) would suggest.

  3. Expect so much more of this.

    ‘Dear Australia’s banks,

    This letter is on behalf of your customers who are doing it tough right now. I’m writing it in the first person, because that’s how I need you to think of me.
    As you know, I’ve banked with you my whole life.
    My loan is just one of the 900,000 that you deferred when this awful pandemic first started. I want to say thanks for the breathing space you gave me.
    But at the end of this month, that support finishes and you’re expecting me to get back on track.
    What happens if I can’t?
    What if I’m one of the people who is going to struggle to get another job, whose business won’t recover, or whose home is at risk?
    If I still can’t pay, this is what I need……..’

    https://www.heraldsun.com.au/news/opinion/fiona-guthrie-now-is-the-time-for-banks-to-focus-on-their-customers-financial-wellbeing/news-story/0305f37fa673e4cd5d7e33dad50f5094

    • Fiona is a legend and I admire her work but this is pretty naïve. The banks will drag their feet to be seen as compassionate and make nice noises but at the end of it all, they need to screw some people, make some cash, deliver some decent dividends to boomers and asset managers or they are in big strife. If the board needs to choose between a nice big bonus for helping the bottom line or helping the great unwashed… well, time to temper ones sense of justice I suppose. Wait until the Murdoch press starts spinning it as “Deadbeat borrowers shirk their loans- self funded retiree bank dividends to drop!”- the Scomo public/private consortium debtor prison building construction stimulation plan will be all systems go.

  4. As soon as those loans are deemed non performing, the banks risk rating goes up, and they have to start reserving more capital to meet benchmarks. Where is that money going to come from?

    • That’s a very good question. The answer was intended to be: the virus will pass and everything will return to normal, payments resumptions all round, meaning no need for significant capital increases.

      The best laid plans of mice and men, eh ….