Richard Holden, a professor of economics at the University of New South Wales Business School, told The Australian Financial Review that Australia is following the same mistakes made in the US housing market that caused the housing breakdown and the global financial crisis.
The professor continued to say that there are signs that point to the problem, such as lenders that “let you borrow a lot compared to your income”, high-risk mortgage structures, and extraneous mortgage broker and commission incentives.
Professor Holden wrote that “A remarkable 55 per cent of all new mortgages come through a broker. And those brokers get paid based on how many dollars of home loans they write. Their incentives are thoroughly misaligned with both borrowers and lenders – just as was the case in the US a decade ago. There are also high-powered incentives for those originating loans with banks, creating more moral hazard.”
Peter White, the FBAA’s (Finance Brokers Association of Australia) executive director dismisses the claims of Holden and told The Advisor that he thinks Professor Holden’s analysis “shows absolute ignorance, to the nth degree, of what actually happened in the US. It had nothing to do with brokers. Brokers are a distribution channel. What caused the US GFC was that the wholesale corporate bond market was getting greedy on low-doc lending and then had bonds that they wouldn’t sell. It had nothing to do with brokers whatsoever.”
Mr. White used some strong words towards the professor, then continued to say that broker remuneration and incentives have been mentioned in many reviews over the past few years. He said that Holden’s comments “don’t make any sense whatsoever in the context of the current market”.
Executive Director White touched on Mr. Holden’s words about the “moral hazard” he mentioned. White addressed these comments with these words:
“Australia is globally known as being one of the most regulated countries in the world and it ensures that any potential risk is mitigated and looked at to ensure that there is no moral question. Bonus incentives have been looked at to try and remove any risks, and that is what we’ve done. These are things that were done in the past, it’s not current. So, he is not up to speed with what is happening in the current reality of the current market. Drawing these analogies to the US market and pointing some line to brokers and their payment and incentives is just garbage.”
Several Australian brokers contacted The Advisor to voice their thoughts on the matter.
Ian Simpson of Smartline mortgage brokers said he doesn’t agree with much of Professor Holden’s thoughts. He told The Advisor that comparing the US subprime market with Australia’s current market was wrong because of the instances of low-doc lending that occurred in the US where verification of income was not required. Australia has fewer than 5 per cent low-doc loans and mostly uses variations of income verification.
Simpson also refuted both the broker allegations of Holden. He said there have been excessive reviews and analyses of the overall broker remuneration model, and this has shown that brokers have minimal influence over the amount a borrower can borrow.
Simpson asserts that in 99 per cent of the cases, brokers check the customer’s scenario, assess their income, how many fixed liabilities they have and how much they deposit, etc. before they can be considered for a loan. The amount the client borrows is no dictated by the broker, but by their own circumstances (financial).
According to Simpson, “Within the broker community, I’d say that 90 per cent of brokers have a long-term concern of their clients (in every industry about 10 per cent do), because if you don’t have a concern for the long-term health and welfare of the client, you don’t actually have a business. And given all the levels of compliance and continued education and scrutiny, you’re not thinking about getting a few extra dollars in commission now at the detriment of your client. Your client needs always come first, and their best interests come first, because our business are only built on happy clients and long-term relationships.”
The Smartline mortgage broker said that the lending market is not loose, but the tightest he’s seen in over a decade. He said, “Australian lending standards are probably the tightest lending standards that I have seen in my 15 years of being a broker.”
He mentioned he’s never seen such a large gap between the interest and servicing rates, which he doesn’t seem to think is a bad thing. Simpson said that “borrowing money is hard” and banks are expecting more information than ever before they will approve loans. That makes it a daily challenge to get loans approved.
Simpson believes that since current credit conditions are so tight, and the Royal commission is involved, banks will be asking more questions of those seeking loans, not less.
Ian Simpson says that as far as remuneration goes, brokers are working harder than ever for their money with the challenges of getting approvals. “And from a systemic point of view, the market is healthy, and if the regulators weren’t, there then the housing market would be putting the financial system at risk.”
He finished with, “Just because the US housing market went up and then had an almighty housing crash does not mean that we are going to have one here in Australia. I don’t believe that at all, considering the house price growth in the last 12 months has risen by 3 per cent. That’s hardly a market out of control.”
As a general rule, your broker will do whatever possible to help you get a home loan, but your financial circumstances ultimately determine whether you get approved and how much you get approval for.
First Choice Mortgage Brokers are a Sydney Mortgage Broker operating under the Australian Credit Licence Number: 382370