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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The credit crunch in Australia explained

August 6th, 2008

By Cameron England | July 30, 2008 12:00am

Source: dailytelegraph

THE average Australian, a year ago, probably never had heard the terms sub-prime, credit crunch or quaintly named US firms Fannie Mae and Freddie Mac.

Twelve short months later, they have become part of the parlance of commentators trying to predict if the economic gloom which has swept through the US and continues to wreak havoc there and abroad will translate into problems for Australia.

Fannie Mae and Freddie Mac are the nicknames for the two biggest mortgage companies in the US, which together own or guarantee more than $US5.3 trillion ($5.6 trillion), or 40 per cent, of loans.

The US central bank, the Federal Reserve, this month announced it would lend money to the two, effectively ensuring they would not go under - a scenario which could trigger a full-blown crisis in the US financial system.

The need for the Fed’s action was a sign the sub-prime crisis, which started in the US in the middle of last year, still is very much with us.

When the crisis started, many experts predicted Australia would not suffer unduly from any US downturn as our economy had “decoupled'’ from the US, in favour of the emerging Asian economies.

Despite this assurance, the Australian share market has fallen further than the US market over the past year.

In the past week, the NAB admitted it would make a provision for $830 million to cover bad debt related to the U.S. mortgage market, adding to $181 million set aside. The ANZ warned it would have to set aside $1.2 billion to cover its exposure to commercial property firms and stockbrokers, among other issues.

The sub-prime crisis emerged in the middle of last year and rapidly triggered what has become known as the global credit crunch.

Sub-prime refers to a type of mortgages available in the US which required little or no up-front deposit; were given to people with poor credit histories and, in some cases, no job.

Some of those loans had low initial interest rates, which enticed people to take them on, believing they could refinance later, before the real interest rate kicked in.

There also was the belief among borrowers they could rely on the equity in their property as house prices increased. US house prices dropped in 2006-07, making refinancing more difficult.

Defaults and foreclosures increased dramatically and mortgage lenders started to hit the wall.
What does this have to do with Australia?

The problem lies in part in the way the risk of lending money to these high-risk borrowers was managed.

As often is the case, rather than assume all the risk for themselves, banks or mortgage brokers will bundle several mortgages together, then “securitize'’ them. That basically means they create shares in the overall package, which can be sold on to other investors on the basis of a steady return of income.

Those types of investments generally are quite safe and are marketed as such. As more and more people defaulted on their loans - foreclosures were up 79 per cent to 1.3 million in 2007 US firm RealtyTrac says - investors around the world, including some Australian firms, started to feel the pinch. Others went broke.

Once venerable US investment bank Bear Stearns was bought by its competitor JP Morgan Chase for $US10 a share, compared with its $US160 a share the year before.

The chief executives of Merrill Lynch and Citigroup in the US resigned following massive sub-prime-related write downs. The problems had a knock-on effect into the wider financial community.

There was a significant loss of confidence in assurances that so-called low-risk investments were as safe as they seemed. Firms which had been willing to lend money reduced their lending or increased interest rates.

Companies which were exposed to the credit market, such as mortgage lenders or commercial property firms with high debt levels, suddenly found themselves unable to refinance their debt.

Centro Properties Group, Australia’s second largest shopping centre owner, watched its shares plunge after it announced late last year it was having trouble refinancing $3.9 billion debt.

Shares in Rams Home Loan Group (now RHG) plunged after it said it was having trouble rolling over $6 billion in liabilities.

Another side effect of the rising cost of debt has been the practice of Australian banks raising their home loan interest rates faster than the Reserve Bank raised it, provoking the ire of consumers.

In September, Britain experienced its first bank run since 1866, says The Economist, when its fifth biggest mortgage lender, Northern Rock, said it was having trouble raising liquidity.

The International Monetary Fund estimated this week the potential losses from the crisis could add up to $US945 billion. The US Government has been rapidly cutting interest rates over the past year to try to stem the fallout from the crisis. US rates have been reduced from 5.75 per cent to 2.25 per cent between September and March.

The bad news continues to flow, with the aforementioned bailout of Fannie Mae and Freddie Mac a sign the worst could be yet to come.

The crisis has pushed the US to the brink of a recession, as housing sales and construction slump, consumers stop spending and banks lay off employees - 34,000 in the nine months to March, according to news service Bloomberg. US President George W. Bush announced a $US168 billion economic stimulus package in February to help jump-start the economy. Record high fuel and food prices, however, were expected to wipe out many of the gains.

Glenn Stevens, the governor of our own central bank, the Reserve Bank of Australia, said recently the fears of a full-blown financial collapse in the US had “abated somewhat over the past couple of months'’.

The risk of a sub-prime style crisis in Australia, at least stemming from the same causes, is low.

The Reserve says the closest equivalent to sub-prime loans in Australia are non-conforming housing loans, which account for about 1 per cent of all outstanding mortgages, compared with the 15 per cent sub-prime share in the U.S.

Mr. Stevens believes the danger to Australia’s economy lie in the realm of inflation - ironically a symptom of an economy travelling too fast, rather than too slow.

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The dream is alive

July 29th, 2008

Article from: Sunday Herald Sun

*by Tony Rindfleisch
July 27, 2008 12:00am

THE headlines shout bad news about interest rates being up and housing affordability going down.

Rental prices are at their highest point yet and the rising cost of living is forcing many first-home buyers to worry about whether they will be able to buy a house.

While the great Australian dream might appear to be sliding off the radar for many, real estate industry experts insist there are options for first-home buyers prepared to compromise.

Today’s “have it now” generation might find it a bitter pill to swallow, but those prepared to live in a smaller or less conveniently located property than they would prefer can take their first steps on the property ladder.

So where are the best places and why? And what factors should buyers consider before spending up big on a home?

The Victorian market is in a lull after the high-speed price gains of last year, providing buyers with time to make a considered purchase.

Leading agents believe major infrastructure projects, transport links, jobs creation and median house prices are issues to watch when deciding where to buy.

NORTH

Epping, Mill Park, South Morang and Reservoir lead the pack of suburbs suggested by major agencies as ideal places for first-home buyers.

First National Real Estate chief executive Ray Ellis said most of these suburbs had house-land deals at the bottom of the price scale. New houses had the advantage of not needing renovations, he said.

Barry Plant Group director Barry Plant highlighted Roxburgh Park as a suburb where buyers could get a modern house for less than $300,000.

Rescom director Robert Findlay added Oak Park, Pascoe Vale and Brunswick West as suburbs offering attractive lifestyle options.
He said Regent, near Reservoir, was another hot spot.

LJ Hooker’s Victorian franchise representative, David Harris, said the cheaper suburbs gave buyers more “bang for their buck” but were not necessarily the best for first-home buyers with an eye on capital growth. Buyers prepared to secure a one or two-bedroom unit before moving to a bigger property would be best to look at Coburg, Preston and Thornbury, he said.

SOUTH

For the same reason, Murrumbeena and Oakleigh were attractive because they had strong transport links and continued demand, he said.

Frankston is a standout, despite being slow to live up to its widely publicised tag over recent years as the “next big thing”.

Terry Ryder, of property analysis website Hotspotting, said Frankston had all the hallmarks of a suburb set to go places, with cheap houses close to the beach and city access via Eastlink freeway.

Dandenong had a strong employment base with $300 million in new infrastructure pouring into the suburb, which would increase its demand from home buyers, Mr. Ryder said.

Mr Findlay said Edithvale and Carrum Downs were attractive for reasons similar to Frankston.

EAST

Eastlink is set to increase the value of suburbs along its route into new territory.

Ray White’s Victorian general manager, Andrea McNaughton, listed Wantirna and Ferntree Gully as popular suburbs set to be enjoying greater demand as a result of the freeway.

Suburbs along Eastlink that also had train stations, such as Boronia, would benefit, Mr. Plant said.

Mr. Findlay added Nunawading, Mitcham and Croydon, saying they also had leafy, bigger blocks close to shops and other facilities.

Stockdale & Leggo chief executive Peter Thomas said Pakenham offered great value for money.

Berwick and Ringwood were Mr. Ellis’s choices.

WEST

Footscray was like Richmond 10 years ago, Mr. Ryder said.

“It is now becoming trendier, there has been strong price growth and there will be an upside over the medium term because the area is being gentrified,” he said.

He also listed Melton, Deer Park and Caroline Springs as suburbs attractive to first-home buyers.

Mr. Plant said Hillside had three-bedroom, two-bathroom houses less than five years old for less than $300,000. Werribee and Hoppers Crossing still represented good value for new buyers, he said.

Mr. Thomas said Tarneit was “taking off” and Mr. Harris highlighted Point Cook, Deer Park and Taylors Lakes. Mr. Findlay said Sunshine, Spotswood and Maidstone ticked the boxes buyers wanted with transport, shops and facilities.

Asked whether it was better to buy now or wait until spring, Mr. Harris said there were always good and bad buys on the market.

The best time to buy was when the buyer was ready and the property they wanted came on the market, he said.

Ms McNaughton said prices would not change much before spring. Buyers hoping to pick the bottom of the market could get it horribly wrong, she said.

“The biggest risk is not being in property, rather than where you buy,” Ms McNaughton said.

REGIONAL

Geelong, Ballarat and Bendigo had everything buyers could want, Mar Plant said.

Mr. Findlay added Warrnambool and Mildura, suggesting their economic diversity and lifestyle options would continue to generate demand.

Traralgon and Morwell offered houses for less than $200,000 close to Melbourne where there were solid sources of employment, Mr. Ryder said.

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Tactical mistakes for buyers at Auction

July 29th, 2008

Article from:
Craig Binnie, property reporter
heraldsun.com.au

July 28, 2008 12:00am

EVERY weekend dozens of anxious, inexperienced buyers allow themselves to be manipulated by cunning auctioneers who have spent years mastering techniques of manipulation.

Take the recent auction of a Hawthorn apartment with a listed expected selling price of $270,000 to $305,000.

A lack of bids forced the auctioneer to start with a vendor bid of $270,000.

A vendor bid is a bid from the owner. It doesn’t mean there is someone willing to pay this much and there is no reason to bid against a vendor’s bid.

Staggeringly, the auctioneer followed with another vendor’s bid — this time for $280,000.

The auctioneer was bidding against himself and he expected the crowd to join in.

The auctioneer “graciously” told the crowd he was willing to accept $5000 rises.

But why would anyone bid against the owner, never mind pay $5000 more? Amazingly, someone did — bidding $285,000 — after which there were no more bids and the property was passed in.

Buyers’ advocate David Morrell, of Morrell and Koren, said as soon as the bidder stuck up his hand he passed all the bargaining power to the agent/owner.

Instead of letting the property pass in with no bids where the buyer could start negotiating at $270,000, or below, the negotiating had to begin at $285,000.

“Only fools bid against the vendor as you are effectively bidding against yourself, unless you clearly want the exclusive right to treat with the vendor, but it’s not something we would advise,” Mr Morrell said.

Down the road at another Hawthorn auction, a young and inexperienced buyer was trying out a strategy he had no doubt picked up from one of the dozens of “how to buy a house” books that line bookshop shelves.

He was using the confident bidder strategy — the one where you raise the bidding by $5000 or $50,000 when everyone else is going up by $1000.

The theory is the bidder’s confidence will scare off other bidders. But who is going to suddenly stop bidding because someone raises the bids in $5000 lots?

If a buyer has a limit of $300,000 they will keep going until this level is reached — and probably a bit more once their emotions and a crafty auctioneer get involved.

In this case the competing bidder kept raising Mr Confident’s bids by $1000.

In the end Mr Confident got the property but only after his bravado receded and he was forced to lower his bids to $1000.

Had his tactic succeeded he could have paid $4000 more than he needed to — more than enough to fully furnish the flat he was bidding for and still have change.

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Conduct unbecoming - Debt Collection & Debt Collectors

July 28th, 2008

* SOURCE: Lesley Parker - The Age 12th June 2008


Agencies are cracking down on harassment from debt collectors. Regulators have warned that they are keeping a sharp lookout for breaches of laws governing debt collection, as higher interest rates, rising petrol costs and a possible economic downturn put household budgets under financial pressure, pushing bills into arrears…

This follows a high-profile case in which the Australian Securities and Investments Commission found that subsidiaries of GE Money had used unreasonable debt collection tactics, such as contacting debtors at their workplaces.

ASIC and the Australian Competition and Consumer Commission last year released a joint consumer guide to dealing with debt collectors, noting a steady increase in consumer complaints in this area last year.

The latter’s deputy chairwoman, Louise Sylvan, says that in 2008, “We still have complaints, no doubt about that - it takes quite a while to get some of these behaviours out of the markets.”

And with economic conditions putting household finances under pressure, she agrees there’s the potential for complaints to ratchet up.

“We haven’t seen greatly rising complaints this year but these things often have long ‘tails’ - sometimes you don’t see it for quite a while,” she says.

“A lot of industry people want to improve their practice and I think that’s happened. Nevertheless, sometimes it is still the case that people cross the line. We want to police that very carefully … If we see increased complaints, then we are going to act.”

Sylvan says people being chased by debt collectors are already in unfortunate circumstances and don’t need to face harassment on top of that.

“Yes, a company has a right to collect the debt but [does not] have a right to harass people and treat them unfairly in doing that,” she says.

Sylvan says the regulator is also putting companies on notice that selling their debt to another business - a practice that is an increasingly popular way to manage cash flow - doesn’t absolve them of responsibility for the way their customers are treated.

In a “factoring” transaction, for example, businesses sell their accounts receivable at a discount to a factor - to gain access to the money now rather than later - and the factor then seeks payment from the debtor.

“When companies on-sell their debt - which is now the norm - our view is that if company ABC has sold it, the debt is still looked at as being company ABC’s. Their reputation is still on the line and they can’t wash their hands of it,” Sylvan says.

“How these people behave is affecting the reputation of those companies. We are very strong on that.”

The Trade Practices Act, administered by the consumer body, and the ASIC Act bar debt collectors from using physical force, harassment or coercion, from misleading or deceiving you (or trying to do so) and from taking unfair advantage of any vulnerability or disability you may have, in what is called “unconscionable” conduct.

These laws protect you as well as your family and associates. They cover creditors collecting a debt themselves, anyone acting on behalf of the creditor, such as a debt collection agency, and anyone “assigned” or sold a debt.

According to the regulators’ joint guide, a debt collector should only contact you when it is “necessary” to do so and when the contact is for a “reasonable purpose”, such as making arrangements for payment.

Contact should be limited - unless agreed otherwise - to a maximum of three phone calls or letters a week but no more than 10 a month. Phone or personal contact can be made only between 7.30am and 9pm on weekdays and 9am to 9pm on weekends. You must be left in peace on national public holidays.

Debt collectors should aim to arrange terms of repayment over the phone and by letter and can only come to your home if there’s no other way to reach you. The guide says that, as a rule, personal visits should be limited to one a fortnight and take place between 9am and 9pm.

“A debt collector should not visit you at your workplace unless you request them to, or if you haven’t given them any other effective way to contact you,” it says. Even then, the debt collector must never reveal information about your situation to anyone else.

WHAT THEY CAN’T DO

In examples of conduct likely to breach consumer protection laws, the guide says debt collectors can’t:

* block your way;

* use obscene, demeaning or racist language;

* leave messages about your situation that others may hear or read;

* say that unpaid debts are a criminal offence (being in debt is not a crime);

* say that your children can be taken away from you;

* send letters demanding payment designed to look like court documents;

* pretend to be, or pretend to act for, a solicitor.

Nor can they make false statements about what will happen if your debt isn’t paid - for instance, by saying your goods will be seized immediately when there’s no mortgage over your goods, and if there were you’d be given 30 days’ notice.

If you dispute a debt, a debt collector should hold fire until the debt has been confirmed. A default can’t appear on your credit report while a debt is still in dispute.

Australian Competition and Consumer Commission deputy chairwoman Louise Sylvan says consumers who believe they’ve been treated unreasonably should contact the ACCC or the (ASIC) Australian Securities and Investments Commission.

People who find they are getting behind on debt should contact a free, government-funded credit counselling service earlier rather than later.

Brought to you be www.mrsmortgage.com.au

Disclaimer: This document is for information purposes only, and must not be relied upon as a substitute for professional services or legal advice.

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