Paying more … banks are doing better even though borrowers are about $530/month worse off

April 13th, 2009

Gouging by banks revealed
Scott Murdoch and Tim Boreham | April 13, 2009
Article from: The Australian

THE major banks are making $450 a year more from each average home mortgage today than before the global financial crisis as they exploit weaker competition from non-bank lenders.
The cash grab by big banks, revealed in an analysis conducted for The Australian, threatens to further increase tensions between the banks and the Rudd Government.

Paying more … banks are doing better even though borrowers are about $530/month worse off / Graphic: Eric Auld

The banks have cried poor, declaring they cannot afford to pass on the full benefit of the Reserve Bank’s latest 0.25 percentage point interest rate cut because they are suffering from increased costs.

The ANZ, Commonwealth and Westpac have cut mortgage rates by only 0.1 of a percentage point while the NAB has given mortgage holders nothing.

However, an analysis of bank funding costs by Fujitsu Consulting shows the banks have increased the profit margin on home loans over the past two years.

The major banks are making at least $450 a year more on the average mortgage now compared with two years ago, at the peak of the economic boom and when interest rates were higher.

The raised margin reflects reduced competition as the majors buy smaller competitors and non-bank lenders exit the market.

The banks are disputing the Fujitsu assessment. However, it increases the political pressure on the Government, which has been accused by the Opposition of being too close to the banks.

Calculations by Fujitsu Consulting show the profit margin on a $300,000 loan has increased from 0.8 per cent two years ago to 0.95 per cent. The increased profit margin has coincided with the banks’ share of the home loan market surging past 90 per cent.

In the past year there were 125,000 new mortgages originated, which, based on an average loan and the increased profit margin compared with two years ago, means the banks have earned an extra $56.25 million from those mortgages alone.

Fujitsu’s calculations were based on the net margin between a blended mix of funding sources for the major banks.

A recent report by Fujitsu and investment bank JPMorgan found that the cost to banks of raising money in Europe, one of the major markets for the institutions, has become significantly cheaper, by at least 0.5 per cent, in the past month.

“The banks have been more aggressive in reclaiming these higher funding costs to maintain profitability,” analysts at JPMorgan said.

“Banks have already passed on considerable rate rises to both households and businesses.”

The decision by Westpac, ANZ and the CBA to cut their standard variable rate by only 0.1 of a percentage point was expected to save the three banks $850million a year, they said.

“At the moment, on our calculations, the margins on the loans have increased and the reason for that was we had a lot of non-bank lenders in the sector,” Fujitsu’s Martin North said.

“When the non-banks disappeared, all the competition disappeared.”

However, Fujitsu’s findings were challenged by CBA and Westpac, the country’s two biggest home lenders.

CBA spokesperson Steve Batten said the $450 figure was “not consistent” with the bank’s experience. “The margins on CBA’s home loans … have contracted, as reported at our interim results in February,” Mr. Batten said.

Westpac spokesperson David Lording said its margins had been “contracting for many years”.

Goldman Sachs JBWere chief economist Tim Toohey said the Reserve Bank would have been aware of the prospect of the retail banks not cutting rates when it decided to move interest rates down to 3 per cent.

The Bank of Queensland chief executive David Liddy said the political reaction was not justified as the Australian banks still faced higher costs for funding sourced from domestic and offshore financial markets.

“To hear the Government and the Opposition say that banks need a kick up the bum is irresponsible,” Mr. Liddy told The Australian. “I think that the federal Government is only interested in one thing and that’s the stability of the big four, they are not interested in competition at all.” Mr. Liddy has campaigned for the Government to reduce the 150-basis-point charge the bank incurs for using the government guarantee to insure retail deposits and access overseas funding markets, whereas the top four banks pay 70 basis points.

“That needs to be fixed, there has never been that much difference between the pricing in the market,” Mr. Liddy said. “That is why we are not seeing all of the changes in the cash rate being passed on.”

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Decoding real estate jargon - REAL estate agents are often guilty of talking in another language

March 1st, 2009


Article from: Sunday Herald Sun
CAROLINE JAMES, Key editor
February 11, 2009 12:00am

REAL estate agents are often guilty of talking in another language.

Unscrupulous agents may run “ghost'’ auctions, take “dummy'’ bids or actively “condition'’ vendors with claims the property market is “coming off the heat'’.

Property dialect is often amusing.

Did you hear the one about the “cosy'’ one-bedroom unit that smelled like sea air?

Intrigued, you organise an inspection only to find “cosy'’ means a 3m by 2m living room and the unit abuts a 24-hour fish and chips shop, hence its pungent salty stench.

Real estate speak can be confusing.

Perhaps you have been told there is “hot'’ interest in a property so the seller is “in the box seat'’.

When the open inspection rolls around, nobody attends.

“Make your best offer,'’ the agent says.

“You are definitely in the box seat'’.

Real estate promotional materials would often make a romance novelist cringe with their colourful, ambitious descriptions and acronym-rich text.

“Real estate writing is a lot like a Mills and Boon novel,'’ Keyhole Property Investments director Melissa Opie said.

“You are working for the vendor. Your job is to romance buyers. You only get one chance, particularly in a market such as this, so you’ve got to grab attention.'’

Ms Opie, an advocate for buyers and sellers, employs copy writers to craft her sales materials.

Realising “some people are better at the spoken word, some the written'’, she prefers to leave real estate writing to the experts.

A client recently came to her, excited by a property advertisement, telling her it “ticked all the boxes'’.

“I went for a look and found it was under a bridge and next to three car garages,'’ Ms Opie said.

“You could say it had been hit on the head, taken to ugly land.'’

The enthusiastic client was sent images of the property’s less marketable features. Not surprisingly, she didn’t want to take the sale any further.

“I’ve got to hand it to the seller’s agent — they did a very good job promoting that property’s best features and getting us there.'’

Buyer advocate Christopher Koren, of Morrell & Koren, likened agent language to “a secret society'’.

“It is the real estate equivalent of the (Free)masons, pretty much only used between agents,'’ Mr Koren said.

“The most important thing to ask agents is for plain speak”.

“Ask direct questions and you should get straight answers”.

If you are still bamboozled by property market propaganda, the Sunday Herald Sun polled real estate pundits for their favourite agent words and phrases and translated them to plain English.

Prepared to be amused, enlightened and disturbed.

CLEAN AGENT WORDS

May come up in polite property conversation and handy to understand if you hope to talk the talk:

Asking Price — the listed price of the property, open to negotiation, not a fixed price.

Fixture — anything of value permanently attached to, or a part of, a property.

Forthcoming auction, prior offers invited — the vendor wants, or needs, to sell prior to auction as they may have bought elsewhere.

Coming off the boil/cooling down/heating up/hot buying — reference to temperature is common in real estate circles: the hotter it is, the more expensive and/or desirable it is.

Gazumping — when a seller verbally accepts a buyer’s offer, but later sells the property by exchanging contracts with another buyer for a higher price.

Private treaty — a private sale.

Chattels — assets such as machinery, tools, furnishings and fittings that, if fixed to a property, can be easily removed.

Realisation sale — means desperate vendor or desperate estate agent. The next step usually involves the bank.

Motivated — if used to describe a vendor, can mean desperate; if used to describe an agent, can mean willing to sacrifice commission to sell property at any price.

Desperate — desperate.

DIRTY AGENT WORDS

These words won’t appear in any sales brochures, but if you hear them spoken, be wary:

Conditioning — the practice of convincing a vendor to lower the asking price. Treat with suspicion comments about how quickly lower-priced properties are selling in your neighbourhood.

Dummy bidding — an illegal practice of putting someone in an auction crowd with the aim of artificially inflating a property’s sale price with false bids.

Ghost or dutch auction — an auction-like private sale without fixed deadline. Multiple prospective buyers’ offers are privately disclosed to each other to try to raise the final sale price.

DECODING BROCHURES

When real estate agents get industry qualifications, some get a “poetic'’ licence:

Sophisticated city living — next to a noisy bar, expect drunks to knock on front door at 3am.

Cosy/intimate/petite home — no room for six-seater modular sofas.

Rustic — barn-like, without the livestock, could “need TLC'’.

Dolls’ house — a tiny home, may suit dust-collecting knick-knacks.

Sea glimpses — NASA-strength binoculars should render views of something wet; take a packed lunch on walks to beach.

Sea sounds — close to beach, but landlocked by six-storey factories.

Treed aspect/picturesque views — any view not of a brick wall.

Meticulously maintained/original condition — kitchen and bathroom circa-1950.

Master bedroom — outdated term, should read “biggest'’ bedroom.

Hostess kitchen — outdated, suggests cooking is a woman’s role; should read “kitchen'’.
1.5/2.5 bathrooms — half rooms do not exist; usually means a toilet with basin.

Country lifestyle — too remote to commute for work or food.

Country kitchen — expect floor-to-ceiling pine, potential for sauna-conversion.

Country charms — see rustic.

Excellent transport links — backing a busy train line or highway.

Opportunity to create your dream — home about to collapse, may have to invest twice the asking price to renovate before liveable.

Renovated, refurbished, redecorated — should read rebuilt, redecorated, repainted.

Architecturally designed — doesn’t necessarily mean an architect designed this home. May mean built to a plan that copied an architect’s work or by someone who’d like to be an architect.

Art Deco — should be used to describe a particular style of 1920s design, but often misused — a cream-brick house is not Art Deco.

Price reduced to sell — vendor very motivated to sell, see Motivated, see Desperate.

Prized inner-city location — could be first, second or booby prize, best to ask.

On-site pool, gym, sauna — expect to pay exorbitant body corporate fees.

Courtyard garden — an oxymoron; concrete pavement with pot plants is not a garden.

SLUG — unpleasant-sounding acronym for single lock-up garage.

DLUG — odd-sounding acronym for double lock-up garage.

TLUGWEDRSS — warning that acronyms can look ridiculous if over-used: in plain English triple lock-up garage with electric doors, room for storage space.

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Revealing the debt pushers - THEY claim to act responsibly

January 18th, 2009

Article from: Jason Bryce
November 24, 2007 12:00am
heraldsun.com

THEY claim to act responsibly, but lenders still aim at the young, the uninformed and those already deep in debt, writes Jason Bryce.

Kasey* from Boronia has an addiction that is affecting her work, her health, her relationships, in fact every aspect of her life.

It is not shady drug pushers that have hooked her on a downward spiral with limited opportunities for escape, it has been some of Australia’s biggest, richest, most respected ASX-listed companies.

Kasey is addicted to credit. When she sees advertising offering her money, she applies.

At just 23, Kasey has racked up more than a quarter of a million dollars of debt. Her minimum monthly repayments outstrip her income by almost $500.

“I’m kind of addicted to finances (sic). Now I’m up s–t creek without a paddle.”

Now that her repayments are more than her income, you might think the financial institutions would stop lending her money, but you’d be wrong.

Just last month, she applied to GE Money for another personal loan of $7000. Not only was the $7000 approved, she was offered $10,000.

“I answered all their questions honestly and told them about all my other debts and my income,” says Kasey. “When I was on the phone to them, I was actually kind of thinking to myself. ‘God, I hope they don’t approve this’.”

Of course no one forced Kasey to take on all that debt; she has got herself into this situation. But there is no doubt that she has been actively encouraged all the way.

Even if Kasey didn’t tell the whole truth about her finances when she applied for that last loan, a quick scan of her credit reference file would have indicated that she has applied for many credit cards, personal loans and a big mortgage very recently. Just that information should have rung alarm bells.

She is a classic preferred customer of the debt pushers — she has a property (a small flat) that can be sold if everything else fails, and she is addicted to debt to fund spending.

Kasey might be in big financial trouble at just 23, but at least she isn’t officially bankrupt, unlike Matt*.

Matt, 25, is a shop assistant from Reservoir, the eldest of four children. He has used credit cards and personal loans to help his single mother with family expenses. Matt entered into a debt agreement (under part nine of the Bankruptcy Act) with his creditors in April 2006 after he ran up $47,000 in unsecured debt to ANZ, Citibank and GE.

His debt agreement means he is legally insolvent. The agreement remains on his credit reference file for seven years.

You might think that no lender would touch an insolvent person, but you would be wrong.

Recently, Matt was approved for a CreditLine card he applied for at The Good Guys in Thomastown. Matt’s debt agreement has now failed and he is filing for full bankruptcy.

GE Money corporate affairs manager Geoff Lynch says: “We would not knowingly extend credit to customers receiving unemployment benefits, who are insolvent or who, for any other reason, are over-extended.”

However, Mr Lynch says, sometimes genuine mistakes are made in the approval process.

“GE Money is a responsible lender and we take that obligation very seriously. It is certainly not in our interest to have customers default on their repayments.”

It may not be in a lender’s interest to have their customers default, but it is also not in their interest for customers to be paying back their cards and loans quickly.

Carolyn Bond, co-chief executive of the Consumer Action Law Centre, says: “Lenders are targeting the people who struggle a little bit to pay off the balances.

“The people who can’t pay their credit card off, but don’t default completely, are the most profitable customers for the lenders.”

The number of defaults and bankruptcies is skyrocketing despite the long economic boom. The number of Victorian bankruptcies and insolvencies is four times higher now than at the peak of the last recession, in 1989-90.

To reduce debt problems, lenders say they need access to more information about us in our credit reference files. GE Money is one lender that has been at the forefront of this debate, pushing for comprehensive credit reporting reform.

Mike Cutter, GE Money’s president and chief executive for Australia and New Zealand, told banking industry newsletter The Sheet in July: “We want full positive credit reporting because it tells lenders how people are managing their existing credit accounts.

“That is the best indicator of whether a person is able to take on more credit.”

The current system of credit reporting includes all applications for credit made in the past five years, bankruptcies, insolvencies, and usually any previous defaults.

That’s more than enough information to raise questions about Kasey and Matt’s ability to repay, even if they lied about their finances when applying.

Also undermining the arguments of the lenders in this debate is the fact that many institutions are approving credit to distressed borrowers more than once.

A good example is retrenched storeman Jacek*, from Narre Warren.

In addition to two mortgages, a big personal loan and credit card all from St George Bank, he has two American Express cards and two Commonwealth Bank credit cards. He also has two car loans and three other credit cards.

Even if St George, Amex and Commonwealth didn’t get enough information from his credit reference file to inform their decisions, they definitely did know what they themselves had lent him in the past, and his atrocious record of paying that credit back.

“Increasingly lenders are targeting people with debt already and people with equity on their homes,” says Carolyn Bond “There is nothing in their current lending practices to indicate that more information would produce more responsible lending.

“I have concerns that more information in credit reference files might create more debt marketing opportunities,” she says. “A person might apply for $5000 for example, then the lender sees they have a lot of other debt and says, ‘Do you want $100,000 to consolidate all that?”‘

Many people in the industry of debt consolidation, refinancing and debt assistance agree that lenders have well and truly headed down-market.

Donna Elliott, a mortgage broker and debt administrator based in Malvern, says: “The theory is that you can afford it if you can cover the interest — that way the lender can get a full whack of interest each and every month.

“Sometimes they work on the premise that a person only needs to repay 3 per cent of their total outstanding balance each month.”

Once they are in debt and feeling the stress of high repayments, Elliott says people are less likely to make clear decisions and plan sensibly.

“A lot of people with debt problems are suffering severe stress or depression,” she says. “They become very reactive and don’t make clear decisions.”

Dave* is an unemployed courier from Geelong trying to overcome a gambling problem he paid for with credit cards. Dave says he has been depressed since he lost his job and marriage, and readily admits that he did lie when applying for his numerous cards.

“It’s definitely a two way street,” he says. “I have been really stupid, but they encouraged me all the way. I was never asked to prove my income.

“Loneliness and depression sent me to the TAB. Now sometimes I think, ‘What’s the point of living?’ There’s a lot of people going through the same feelings as me.”
Kasey is in just that situation now.

“People say to me, ‘You are 23 — how can you have health problems from stress?’ But they don’t know the trouble I have got into.

“Now I have a stomach ulcer, I suffer from depression and anxiety, I’m secluded and my relationships are suffering,” she says.

With a good job and salary, Kasey should be enjoying the best times of her life.

Instead she is suffering from the same kind of symptoms that a drug addict might have. She is addicted to debt.

*Cases-names have been changed.

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NEXT week it will be official – super funds lost 20 per cent or more of our money in 2008.

January 18th, 2009

Article by Jason Bryce
heraldsun.com
January 16, 2009 12:00am

NEXT week it will be official – super funds lost 20 per cent or more of our money in 2008.

“We had a flat December, not as bad as we previously expected, so we think the final median number for 2008 will be -20,” Superratings managing director Jeff Bresnahan said this week.

That means if the average loss is 20 per cent, some funds lost heaps more.

The total damage is in the order of $200 billion.

As a result, 40,000 workers who were going to retire this year have to stay in the workforce.

But in the face of this calamity, the river of commissions and fees deducted from compulsory super payments flows on unabated.

The gateway to the river of cash is the 9 per cent received of every worker’s weekly pay – which must be paid on time every three months.

More Australians are realising they can choose their own fund, or keep their old fund when they change jobs. But 80 per cent still leave the task of choosing a super fund to their new boss.

Since choice of fund was introduced by Peter Costello in 2005, about a million Australian workers have exercised it.

Now that freedom could be under threat. Some in the industry believe it is at risk of becoming a “closed shop” where competition will be off-limits.

The trigger for their concern was a decision delivered by the full bench of the Australian Industrial Relations Commission just before Christmas.

The AIRC was giving approval to 17 new awards as part of the “modernisation” of the awards system. As a consequence of the decision, from January 2010 employers will be able to choose from only a select group of super funds.

This surprised those observers who expected the AIRC to give up being a de facto regulator of super funds.

But just the opposite has happened.

Richard Gilbert, who heads the Investment and Financial Services Association, says the narrowing of choice represents just the first stage in a long campaign by industry funds against choice of fund.

“This is an extraordinary move by the AIRC and could, in effect, deny workers access to some of the most cost-effective super funds in the Australian marketplace,” he said.

The industrial commission created 17 new awards for priority industries. In 14 of those new awards the commission named particular super funds as the only allowable default funds for employer contributions.

Industry funds are the big winners with AustralianSuper, REST, HOSTPLUS each being named in multiple awards.

Only one commercial retail fund is named by the commission as a default fund. AMP got parts of the racing industry.

“Various industry funds will continue to pressure the industrial commission to exclude a range of very competitive super funds from the market,” Gilbert says.

“There are plenty of retail master trusts with lower fees than the super funds on that default list.

“The deals I have seen in recent days, retail funds are tendering employers with fees as low as 0.6 and 0.8 per cent.”

Generally the former public sector funds, now public offer funds, have the best deal on fees, averaging in the 0.5 to 1 per cent range. That’s the range Minister for Superannuation Nick Sherry wants all funds to be charging.

Industry funds average between 1 per cent and 1.5 per cent, with retail super funds adding commissions to fees to take their average to about 2-3 per cent.

“One fund on that default list increased its fees last year by 50 per cent – from $1 per week to $1.50 every week,” Gilbert says.

Newspoll reported in December that 20 per cent of employed people under 65 had changed their super strategy in three months. Eight per cent had changed funds entirely.

“But choice is still pretty small,” says Gilbert. “So there needs to be competition and choice where no choice is made (by the worker).”

Australian Super Funds chief executive Pauline Vamos says many people are happy with their default fund but they shouldn’t need to pay commissions for advice not being received.

Industry Super Network chief executive David Whiteley says the industrial commission has “every right to intervene in the superannuation industry”.

“Everyone supports choice, but super is a creation of the industrial relations system and the commission is just streamlining the super arrangements of many existing awards into the new modern awards,” he says.

Alex Dunnin from research house Rainmaker says industry funds already dominate employer super.

“Retail funds have about 15 per cent of employer contributions but they have vast personal market share and the majority of rollovers are into retail funds,” he says.

“Choice was a big victory for the retail funds. Industry funds felt locked out of the financial adviser channel because they don’t pay sales commissions. This is a bit of a get-square by them and the retail funds should move on and focus on what they are good at.”

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Fannie Mae Eases Credit To Aid Mortgage Lending - The Begining of the End

September 29th, 2008

By STEVEN A. HOLMES
Published: September 30, 1999
Source: The New York Times

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

‘’Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,'’ said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ‘’Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'’

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

‘’From the perspective of many people, including me, this is another thrift industry growing up around us,'’ said Peter Wallison a resident fellow at the American Enterprise Institute. ‘’If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'’

Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

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“What are Fannie Mae and Freddie Mac, and what do they do?”

September 25th, 2008

Copyright Jack Guttentag 2003

www.mtgprofessor.com

“What are Fannie Mae and Freddie Mac, and what do they do?”

Fannie Mae and Freddie Mac are “government-sponsored enterprises” (GSEs). This means that they are privately owned, but receive support from the Federal Government, and assume some public responsibilities.

The GSEs provide a secondary market in home mortgages, purchasing mortgages from the lenders who originate them. They hold some of these mortgages, and some are “securitized” — sold in the form of securities which the GSEs guarantee.

The two GSEs today are among the largest corporations in the world.

What mortgages do the GSEs purchase?

“Conforming mortgages” as they are called consists of all home mortgages that meet the underwriting requirements of the agencies, and are no larger than the largest loan the GSEs are allowed by law to purchase. In 2003 the maximum was $322,700. It is raised every year in line with increases in home prices. The mortgages the GSEs can purchase account for roughly 80% of the conventional (non-FHA/VA) home loan market.

What kind of support do the GSEs receive from Government?

The major support consists of the credit lines with the US Treasury. This, along with their histories — both were public institutions before they became privately owned — mark them as having a special claim for Government assistance in the event they ever get into financial trouble. As a result, investors consider the notes they issue and the mortgage securities they guarantee almost as good as securities issued by the Federal Government itself.

Do the GSEs have competitors?

Not in the conforming loan market. Because of their Government backing, the GSEs can sell notes and securities at a lower yield than any strictly private secondary market firm. This gives them a monopoly — or rather a duopoly, since there are two of them — in the market in which they operate.

The GSEs do have emulators, however, in the non-conforming market. While the cast of players changes, at any one time there are usually 15 or more strictly private firms that purchase non-conforming loans and securitize them in much the same way as the GSEs.

“Why do two private firms receive Government support, while the others don’t?”

The Government did not select the two firms for special treatment. Both the GSEs began as Government entities, and the major objective in privatizing them (while retaining Government support) was to encourage development of a private secondary market. The other firms arose later, based on the GSE model, so that objective was achieved.

If the objective was achieved, why do the GSEs continue to receive special support?

The GSEs are unwilling to give it up, and they have become so powerful politically that they have managed to thwart the several attempts that have been made to take it away.

Do I have anything at stake in this issue?

If you are a potential borrower eligible for a conforming loan, your interest rate will probably be about 1/4% lower than it would be absent the GSEs. This reflects their relatively low funding costs, part of which is passed through to borrowers.

In addition, if you are a low or low-to-moderate income borrower, and/or reside in an underserved area, you might find a loan through a GSE. As part of their public responsibility, the GSEs commit to purchase specified numbers of such loans. How many would not be made without the GSEs, however, is not clear.

As a taxpayer, on the other hand, you have a cause for concern. The low borrowing costs of the GSEs is based on implicit Government backing for their $3+ trillion of debt and guarantees. If the GSEs ever have a financial disaster, the Government will have to bail them out and you and I will be on the hook for the cost.

“Is anybody regulating the GSEs to prevent such a disaster?”

A few years ago Congress gave that responsibility to the Department of Housing and Urban Development (HUD). Very few informed observers believe that HUD is up to the task.

“Is there a way to eliminate the risk of a financial disaster by removing Government support without hurting investors who rely on that support?”

It could be done by 1) revoking the credit line the GSEs now have with the Treasury, and b) providing an explicit Federal guarantee of all debt and GSE guarantees outstanding on the date the credit line is revoked. An explicit guarantee on the old claims would prevent any repercussions in the financial markets, yet put the markets on notice that news ones are not guaranteed. Over time, the volume of guaranteed claims would gradually decline.

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Don’t be quick to fix loans as rates to keep dropping

September 7th, 2008

By Nick Gardner

Article from: Sunday Herald Sun

September 07, 2008 12:00am

VICTORIAN house hunters have been given a new headache with last week’s interest rate cut leaving them tossing up between fixed and variable loan deals.

First-home buyers and those wishing to re-finance have been forced to look hard at the fine print of their loan offers as economists predict interest rates to fall a further 1.5 per cent over the next 18 months.

Even though those with a $300,000 loan would have saved $55 a month from the Reserve Bank’s cut, they may be out of pocket if they lock their rate long term.

Bank variable rates fell to about 8.36 per cent during the week, compared with the best fixed deals that start from 7.99 per cent.

On today’s rates, that is an instant saving for those who fix.

But if predictions of further falls are accurate, variable mortgage rates could fall to about 7.11 per cent within two years.

And buyer beware — that relies on banks passing on their savings to borrowers, which investment gurus believe unlikely given their “higher cost” of sourcing funds on the international market.

Pressure exerted by Treasurer Wayne Swan before the rate cut prompted the banks to respond within five minutes of the announcement last Tuesday.

But Commonwealth Bank boss Ralph Norris said banks might not be able to pass on many more cash-rate reductions.

“I can’t guarantee anything,” he said.

“At the moment we have a situation where offshore funding costs have increased dramatically — about eight fold in margin over the past nine or 10 months due to the overseas crisis,” he said.

Mortgage brokers have been crunching the numbers for borrowers since the rate cut, trying to work out the best way to save them thousands during the life of their loan.

Jennifer Neilsen, chief of mortgage broker The Loan Market Group, urged caution on fixing rates.

“The cheapest fixes at the moment are about 8 per cent and you wouldn’t want to fix yet,” she said.

“Variable rates are the way to go. The trick is to fix when you can see we are nearing the bottom of the cutting cycle, and we are a long way from that at the moment.”

Financial markets have priced in an 80 per cent chance of another cut next month, and were expecting a further two by April, bringing the cash rate down to 6.25 per cent.

Frank Lopez, of financial data firm Cannex, said borrowers could get the cheapest variable rate if they went for a deal with no bells or whistles.

“Many people who take mortgages with lots of additional features such as redraw or payment holidays never actually use them — or don’t use them enough to justify the higher rate they pay for the privilege,” Mr Lopez said.

“Think hard before paying for any extra features at all.”

SAVERS

While borrowers may be celebrating the rate cuts, the future looks less rosy for those banking their pennies.

Savings accounts rates have already been falling and may fall rapidly as further cuts kick in. But there were some good deals available this week.

Many planners advised those who depended on savings accounts to boost their income to lock into a term deposit account before rates fell any lower.

Paul Bilson, of Woodward Nhill Financial Planning, said he favoured a mixture of term deposits and income funds.

“Sure, put part of your money into term deposits, but remember there will be penalties if you need to access your cash,” he said.

Mr Bilson said most income funds, which primarily invest in mortgage debt, were returning seven to 8 per cent “There is a little more risk,” Bilson said.
“They are not guaranteed — you have to make certain that the one you choose is very well rated.”

He said companies including Mariner, Axa and Colonial First State all ran good funds invested in quality loans, fixed interest securities and cash.

INVESTORS

Usually a rate cut is welcomed by the stock market because it makes the returns on cash less attractive and so forces more money into the stock market.

But after the cut on Tuesday, the market finished marginally down and fell further later in the week, stripping 5 per cent off Australian stocks.

It was the worst result since the major index fell 5.53 per cent in March.

Shane Oliver, chief economist at AMP Capital, said: “It is difficult to escape the bad news in the economy, which is going to make it harder for companies to grow their profits, and that will act as a drag on the stock market for some time.”

He said retail and discretionary spending would be hit hard by an economic slowdown.

“Unemployment will rise, but these things do not last forever,” Mr Oliver said.

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Commonwealth Bank posts $4.8b profit

August 13th, 2008

By: Danny John
August 13, 2008 - 11:06AM

Sydney Morning Herald

The country’s largest bank, the Commonwealth, today helped lift some of the gloom that has descended on the domestic economy by reporting a 7% increase in its annual net profits to almost $4.8 billion.

Whilst the rise was not as high as last year’s initial optimistic predictions, the outcome was in line with market expectations after the most volatile trading conditions seen by the industry in 30 years.

With the global credit crisis still raging and the domestic economy having dropped away from its high growth levels of the past few years, the Commonwealth turned in a result that indicated that the slowdown may not be as sharp as some commentators have suggested.

Shares in Commonwealth Bank fell as much as 2.7%, or $1.20 cents, to $43.31, tracking losses on the benchmark index..

The bank’s cash profits - the industry’s preferred measure of performance - came in slightly lower with a 5% increase to $4.73 billion - just over $100 million more than its 2007 record result.

The profit was struck against a 10% jump in income to $14.3 billion. Cash earnings per share though were more subdued, rising by just 3% to 356.9 cents per share.

Analysts had been anticipating a relatively flat result given the way that global funding costs for banks have risen sharply and that lending growth to consumers has slowed in the face of the steep increase in local interest rates.

That was underlined by Commonwealth’s second half performance - which covers the six months from the start of January to the end of this June - where profits were up by just 1% to $2.39 billion.

This was after a subdued first half in which its interim result was struck just as the credit crisis was in full swing.

Commonwealth’s slowing profits also mean that the returns for investors won’t be so high either. The bank today declared a final dividend of $1.53, slightly up on the corresponding period a year ago, which takes the final pay-out of $2.66 - up ten cents or 4%. Last year the rise was 14%.

However, there were few signs of any nasty surprises in the result with the bank seemingly avoiding the bad debt problems of two of its Big Four rivals, ANZ and National Australia Bank.

Commonwealth, which is exposed to debt-stricken corporates like Allco Finance Group, said its total charge for the year has been $930 million which is nearly $500 million higher than 12 months ago.

That takes the bank’s total provisions to $1.74 billion as it steps up its cover for the possibility of more sour loans from hard-pressed consumers and businesses. However, the charge is significantly lower than some of its competitors.

In a reflection of how difficult trading conditions remain, Commonwealth described its performance as ‘’solid'’ but also warned that the economic headwinds it faced over the past year will continue to dominate the industry over the coming 12 months.

All of its main divisions - retail, business banking, wealth management, insurance, international and New Zealand - all did reasonably well, though, all turned in higher individual profit increases despite the pressures on them.

Its outlook statement was overly cautious, with the bank saying that the uncertainty and volatility in credit markets would continue to put pressure on its funding costs and that loan growth _ the key to future increases in the sector’s profit performance - would drop below the average of the past decade.

Those ten years have produced a golden run for earnings growth for banks but the downturn means that the record results are unlikely to be repeated in the immediate future.

Commonwealth’s chief executive Ralph Norris said this morning that whilst he accepted profit growth had not been up to those recorded in previous years, he was still pleased with the outcome given the period the bank had just come through.

As for the coming year, he said the slowing economy was affecting the bank’s customers which was showing up in slowing credit growth.

‘’Whilst these broad trends are clearly evident the duration and extent of the slowdown is more difficult to predict,'’ said Mr. Norris.

‘’There are clearly a number of negatives at work in the Australian economy but it is important that we recognise there are potentially a number of positive influences.'’

These he listed as rising commodity prices, the growth still coming through from the country’s Asian partners, particularly China, the recent domestic tax cuts and “robust'’ business investment and infrastructure spending.

‘’The balance of these opposing forces favour continued modest economic growth not too far below the average of the past decade,'’ added Mr Norris.

However, he also sounded a cautious note and said that The Commonwealth would continue to adopt a ‘’conservative stance'’ until more signs of economic improvement emerged _ a reference to the possibility of interest rate cuts by the Reserve Bank.

Today’s result caps a torrid time for the country’s banking sector which has been gripped by huge volatility in debt financing and equity markets, all of which has been primed by the global credit crisis that erupted exactly a year ago.

Commonwealth’s relatively stable if somewhat flat outcome will at least partly re-assure investors who have been rattled in recent weeks by the profit warnings that emerge from both National Australia Bank and ANZ about their forthcoming figures.

Banking shares took a massive hit last month when NAB revealed it had taken a provision of $830 million against its $1.2 billion of collaterised debt obligations, a portfolio of US subprime housing loan-linked investments.

That portfolio is now effectively worthless with a total charge of over a $1 billion against it - a move which will cut $600 million from NAB’s previously expected profit of $4.4 billion for this year.

ANZ’s annual earnings are expected to be $800 million lower and will only reach around $3.1 billion when it reports its results in three months time because of higher bad debt charges taken against its exposures to the hard-hit property and financial services sectors.

However, some immediate relief has been provided by the two Melbourne-based banks’ rivals in the last few days with Westpac, Bendigo and Adelaide Bank and just yesterday St George confirming that their 2007-8 earnings would all hit a record.

Nonetheless, all three banks stated how tough trading had become over the last six months as the combination of higher funding costs and the wild swings in equity markets - which hits their investment earnings - had put pressure on their margins.

They have also suffered a ‘’double whammy'’ effect with increased interest rates (partly pushed through by the banks themselves) rising fuel prices and soaring food bills have seen lending to consumers drop off at a faster-than-expected level.

This, in turn, has seen growth in the domestic economy tail off sharply with the effect that analysts now expect the banking industry’s 2009 financial year to be harder than the one that is just finishing.

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Tax cheats now more likely to be caught

August 11th, 2008

Article from: news.com.au

By Anthony Keane | July 20, 2008 02:05pm

WATCH out tax cheats. Advances in technology are giving the taxman a sharper eye.

People who deliberately avoid declaring income from bank deposits, shares or even capital gains on property and share sales now are more likely to get caught out by the Australian Taxation Office’s data-matching program.

Even those who inadvertently forget to declare income could get a tap on the shoulder from the ATO, which uses computer technology for data matching tens of millions of transactions each year.

It checks information on people’s tax returns is the same as the records of banks, Centrelink and other government organisations, state property registers, company share registers and private health insurance funds.

The tax manager at Adelaide accounting firm PKF, Vincy Choi, said the use of computers to crunch vast amounts of data had made matching easier. “It’s a lot harder now to say `nothing’ (when asked to declare income),'’ she said.

Miss Choi said apart from the obvious bank interest checks, the ATO was data-matching using South Australia’s lands titles office to check property sales, plus motor vehicle registrations.

The ATO could discover if people who claimed to be earning just $50,000 a year bought a luxury car costing hundreds of thousands of dollars and then ask where the money came from, she said.

“If you can explain yourself they won’t do anything but if you can’t they will start digging. It’s not difficult nowadays with technology to pick things up and, if they do, there will be severe penalties and interest,'’ she said.

Penalties typically totaled between 25 and 50 per cent of the tax shortfall but could be up to 100 per cent, depending on the severity of the case. Interest could be about 15 per cent compounded daily.

Second commissioner Jennie Granger said the ATO heavily publicised its data-matching capabilities to remind people to declare all their interest and dividend income, including money earned overseas and also was closely monitoring sales of investments.

“Improvements in data-matching techniques and access to more data are making it much easier for the tax office to identify unreported gains on sales of investments,'’ Ms Granger said.

“Unfortunately, our review and audit work is still rich pickings”.

“By the end of April we had completed 6393 audits and reviews for capital gains tax which have resulted in revenue adjustments of $50.2 million.'’

Superannuation has been a popular place to inject money since new laws came into force last July.

“Clients who sold assets to invest in superannuation may have a capital gains tax liability which will need to be disclosed regularly,'’ Ms Granger said.

E-tax

The Australian Taxation Office’s free online tax return tool, e-tax, becomes more popular and more effective each year. Recent improvements include “pre-filling” your bank deposit, shares and managed funds data, which saves time and promotes accuracy.

Record keeping

Make sure you can justify any tax deductions with receipts and other financial records.

If work-related deductions total more than $300, evidence is needed to show the total amount claimed.

Family tax benefit

This year is the last year people can claim the family tax benefit with their tax return. In future, the benefit can be claimed as a fortnightly payment or a lump sum through the Family Assistance Office.

Child care rebate

People can no longer claim the 30 per cent tax rebate in their tax return. It is now paid by the Family Assistance Office after they lodge their return and the benefit has been reconciled with Centrelink.

The ATO will automatically process claims for expenses incurred in the 2005-06 and 2006-07 years.

Shareholders

Takeovers in 2007-08 involving major companies such as Coles, Wesfarmers and OneSteel created capital gains tax events for shareholders. You can see how these need to be treated on your tax return on the ATO website.

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How to get a mortgage during the credit crunch

August 10th, 2008

Article from: Sunday Herald Sun
* byJames Campbell
August 10, 2008 12:00am

DITCHING the credit cards, paying your bills on time and shopping around for lenders are among tips from experts on how to secure a home loan.

Amid the credit crunch, mortgages are harder to get than at any time in the past 20 years, experts say.
Faced with a collapse in home lending approvals, would-be borrowers need to get their financial affairs in order before approaching banks, they say.

Despite the plummeting house prices and imminent interest rate cuts, experts predict getting a mortgage will not get easier - with banks toughening their lending criteria.

Steven Anderson, head of research at ratings agency InfoChoice, said potential borrowers needed to take time and care over their mortgage applications.

“This is the first time in a while that the banks haven’t been falling over themselves to lend to you,” he said.

His view is shared by Phil Naylor, CEO of the Mortgage & Finance Association of Australia.

“I think lenders are getting more stringent,” he said. “They haven’t changed their policies, but they are dotting the Is and crossing the Ts.”

To help would-be borrowers, the major banks and financial experts have listed the most common reasons why people are turned down for mortgages.

The bank doesn’t think you can service the debt.

Mr. Anderson said banks were conservative when it came to estimating how much debt people could service.

“If they won’t give you the loan, you should seriously consider a smaller property,” he said.

One way to look better is to consolidate any debts.

“Get rid of unnecessary debt - if you’ve got credit cards and you don’t use them, get rid of them,” Mr. Anderson said.

“The banks don’t look at how much you owe, but at how big the credit limits are.”

Kelvin Lawrence, Westpac’s general manager of mortgage portfolios, said banks looked hard at people’s savings history.

“Having a history of genuine savings stands a borrower in very good stead with the institutions,” he said.

He said if a bank was unhappy with an applicant’s savings history, they could work with a customer to put a savings plan in place.

Steven Shaw, NAB’s general manager of mortgages and consumer insurance, said it was sometimes possible to get around the savings requirements if a family member was prepared to guarantee the loan.

The term of the loan is greater than the time until you retire and the ongoing servicing capability is not evident.
According to Mr. Anderson, this is the easiest financing problem to get around.

“All they do is change the terms of the mortgage,” he said.

“So instead of paying the loan off in 25 years they give you a shorter period, so you pay it off quicker.”

You have had debt defaults or a bankruptcy.

Mr. Anderson said most banks overlooked small defaults on bills.

“If it’s only minor it probably won’t matter,” he said.

Mr. Lawrence said the number of defaults was also important.

“We look at one versus multiple defaults,” he said.

“We are looking for a trend.”

Mr. Anderson said that in the past there were more lenders prepared to provide low-doc or no-doc loans, but those options had shrunk.

“There are still specialist lenders who will lend to people with bad credit histories, but you will be charged a much higher interest rate,” he said.

“Really, the only option is to get someone to go guarantor.”

Security is not acceptable

This means the bank does not accept the valuation of the property and refuses to lend the money.

Mr. Anderson said while it was possible to get your own valuation and appeal against a rejection, there was little chance of the bank accepting it if the difference was too big.

Mr. Naylor said being turned down was not the end of the world.

“The bottom line is if one lender doesn’t want to lend to you - shop around,” he said.

“That’s why mortgage brokers are a good idea - hopefully they can find a lender that meets your requirements.”

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