Is your bank addicted to selling home loans?

A few years ago you could get 100% home loans, sub-prime mortgages and even 106% home loan finance

Then the Global Financial Crisis hit, and suddenly all these loans disappeared. In fact outside the major banks, home loan lending was virtually closed for business as non bank securitised lenders could not get funds or if they could they could not compete with the major banks interest rates.

Responsible lending

Enter the period of ‘responsible lending. Well that hasn’t seemed to last, and we are getting back to the easy money  lending ways we had before, with one non bank lender offering 99% home loans. [OK, you will needs about 3% saved to cover your buying costs, so a total of 4% of the property value saved.]

So I have to ask the question: Are the banks addicted to mortgage loan writing and the selling of assets.

The Home Loan Lenders Dilemma

Hear is the basic dilemma. Without easy credit, home buyers can’t get home loans and homes remain unsold. Over time sellers have to move on with their lives and accept lower prices. Real estate agents wouldn’t like this [and they are already feeling the squeeze], with listings not selling as briskly. So house values fall. If they fall too heavily, then homes are not worth what the buyer has paid, or even what they have borrowed and this may make it attractive to walk.

The Jingle mail scenario and why it won’t happen in Australia

In the US they have an expression for negative equity and its result. Its called “jingle mail”. Homeowners simply post the home keys back to the bank. Their home loan finance law is different to ours in that in the US the homeowner does not suffer.

Here its a different story. Defaulting n your mortgage is a serious breach, and could lead eventually to foreclosure and personal bankruptcy.

This is a powerful deterrent and maybe one of the reasons that we did not see home values slide, like they did in the US.

The banks have a vested interest in the maintenance of property values and even in their steady rise as it gives them a buffer if they have to foreclose, and it means that homeowners are less likely to walk away from their mortgage because they have a positive equity in the property.

The problem is if house markets price themselves out of being affordable. And this won’t happen if we have more and more buyers with growing salaries.

Home buyers today are more sensitive to interest rate rises.

With home buyers super sensitive to interest rate rises, because of the size of loans these days compared to wages, then any big rate rise could cause real issues.

The need for China to keep growing

The other thing is what is happening outside Australia. As long ships leave our shores laden with iron ore and coal, everything should be sweet. If China’s economy cools, or the US has that second dip recession that everyone has been talking about, then rising unemployment could see house prices falling.

Why Australian housing demand will stay strong, buoying home values.

This would never be the disaster that it was in the US because we have a net shortage of housing stock. We also have a more caring Government.

We also have a lot of the infrastructure spending to come that the Government has planned for roads, rail and broadband.

So yes, your bank is addicted to home loan lending and that should be a good thing if kept under regulatory control, and within the bounds of responsible lending if we are to ensure that we don’t over value housing in Australia.