From news.com.au, 7 June 2011:
Fresh evidence is emerging of a “race to the bottom” among banks and other lenders as demand for mortgages slides and competition boils over.
Lenders are increasingly cutting standards by enabling home buyers to make smaller deposits, new research indicates.
About three in every five mortgage products now enable home buyers to borrow up to 97 per cent of the value of their property, according to financial research group RateCity.
RateCity chief Damian Smith said the rise in loan-to-value ratios (LVR) indicated that lenders wanted to kick-start growth in the sluggish home loan market.
“We haven’t seen this level of money offered to mortgage borrowers since the start of 2009,” Mr Smith said.
He warned that change in lending criteria was putting borrowers at risk.
“There is a concern for some borrowers who take on too much debt, because it makes them more susceptible to risk if rates increase or property values fall.”
It’s not just borrowers that are put at risk.
What this means is that the day is drawing nearer when the Government proclaims “No Super For You!!”
How’s that, you say?
Bear with me on this. All will become clear:
High loan-to-value ratios also place banks at greater risk, with the likelihood of a lender absorbing a loss in the foreclosure process increasing as the amount of equity decreases.
Similar borrowing practices were behind the collapse of the US housing sector when people with a higher chance of defaulting on on their payments were provided loans at higher-than-normal interest rates.
Indeed.
It places banks at greater risk.
On 18 May 2011, Fitch’s Ratings credit rating agency offered this ominous warning about Australia’s banks’ lending standards (from Business Week):
… Australian banks could have their credit ratings cut if they lower standards to boost mortgage sales as demand for home loans slumps.
“If we do start to see signs of erosion in those lending standards, there may be some negative pressure on ratings coming through,” Tim Roche, director of Fitch’s financial institutions group in Sydney, told a credit forum today.
Here’s how the domino effect works.
1. House prices fall – as they are right now.
2. Banks lower lending standards – as they are right now.
3. Arrears on mortgages rise – as they are right now.
4. Ratings agencies cut Big Four banks’ credit rating – as they have just done, and are threatening to do again.
5. Banks cost for wholesale funding rises due lower credit rating.
6. Banks pass on increased costs to you, as interest-rate increases.
7. Mortgage arrears rise further due to interest rate, cost-of-living pressure.
8. House prices fall further due “distressed” vendor sales.
9. Banks’ “asset” values, profits fall.
10. Residential Mortgage-Backed Securities (RMBS) fall in value and are downgraded – as they are right now.
11. Banks’ lose trillions on “derivatives” bets related to RMBS.
12. Banks’ credit ratings downgraded even further.
13. Rinse and Repeat, from 5.
14. Bank/s cannot borrow (a “credit squeeze”).
15. Short-sellers smell blood in the water; Banks’ share prices collapse.
16. Banks fail … just as in the USA, UK, and the EU.
17. Government pilfers your super to prop up our government-guaranteed, Too Big Too Fail banks.
Think it can’t happen here?
It can.
And it will.
Both parties are already planning for it.
The Government has effectively guaranteed it (How? By guaranteeing the banking system; a guarantee underwritten by you, the taxpayer).
And Senator Joyce has specifically forewarned of it. Just as he (correctly) forewarned of the US debt default that is happening right now.
Labor has introduced legislation moving in that direction in the May budget.
And the Liberal Party has just announced a new policy – disguised as a “reform” to “help” business – that is aimed squarely at getting the ATO‘s hands on your super … before it even gets to your super fund.
Learn all about the wave of superannuation confiscations rolling across the Western world, and our own super theft to come, here.
UPDATE:
h/t reader and Guest Poster “JMD”, in Comments below.
Want to try and access your super early, and beat the government to it?
No can do.
Not unless you’re underwater on your mortgage. Then you can … to pay out the banksters:
“You can however access your super early, ‘to prevent your home being sold by the mortgage lender as a result of non payment on your home loan’. It would be interesting to find out when that rule was slipped in, allowing the banks to access your super but not you.”
Go to http://www.rest.com.au/Forms-Publications.aspx
You will see a tab to click on; Withdrawals from your account, then a pdf; “Fact Sheet: Accessing your super early.”
Barnaby Is Right 
Here’s an interesting superannuation anecdote. I was just looking up the fact sheet for accessing your super early & it turns out it’s impossible unless you’re about to die or are permanently disabled.
You can however access your super early, “to prevent your home being sold by the mortgage lender as a result of non payment on your home loan”. It would be interesting to find out when that rule was slipped in, allowing the banks to access your super but not you.
Meanwhile, the super fund gets its fees, the government gets its tax & if the fund loses your super on the stockmarket, well, that’s just tough.
Can you get me a link, JMD? That’s a really important bit of info, and should be publicised.
Go to http://www.rest.com.au/Forms-Publications.aspx
You will see a tab to click on; Withdrawals from your account, then a pdf; Fact Sheet: Accessing your super early.
It would also be interesting to know if the bank has direct access to your super in the event of “non payment on your home loan”, as in the bank takes it whether you like it or not.
What a scam, I’m glad my super account has sweet FA in it, my contribution to the government won’t go far!
Something else you might add to your domino effect is that as bank bill prices fall, as they will with credit downgrades, money market spreads widen. This tends to see the AUD fall against the USD & maybe even other currencies (I only keep tabs on the USD).
Unless commodity prices are also falling in USD you will see consumer prices rise here, for things you need anyhow, rather than things you want.
A very good point JMD … I was aiming to try and keep it fairly simple 😉
Perhaps you might like to write another Guest Post specifically on this, laying out in simple language the ‘domino effect’ (negative feedback loop)?
I’ll try & put something together & email it to you
Cheers
Here’s something else of interest. One of ‘Australia’s best econobloggers’ over at MacroBusiness.com.au has an atricle which discusses government bond yields & how they are falling even in emerging markets such as Latin America. In it he says;
“This is reflective of a huge move towards government debt as an asset class over the last 30 years, as most nations have private and public pension schemes and finances that rely upon a liquid and growing government debt market.”
He doesn’t discuss WHY pension schemes require a liquid & growing government bond market but nevertheless, with us plebs not being able to access our ‘money’ until 55, the government has effectively already confiscated everybodys superannuation by virtue of the majority of it being ‘invested’ in government bonds.
Thanks, I’ll take a look at that.