Will the death of the “no deposit” home loan signal tighter Bank lending guidelines

Is this CBA media announcement the end of easy home loans as we know it?

It’s beginning to look a little bit like a credit squeeze the Banks did not want to have. The Commonwealth Bank has announced stopped offering no deposit home loans, with the ANZ looking at the quality of the borrower before ditching this US import [yes the same loans that created the US financial collapse and US housing market collapse two years before was given a life here, albeit to clear credit clients [unlike in the US].
The good news is that the smaller players may still keep this loan alive, as there are good credit risks that need this type of finance for well priced property that may have hit rock bottom.

The Lo Doc and the No Doc Home Loan

The Lo Doc home loan was an Adelaide Bank innovation that made a lot of sense when a borrower could buy a home for $150,000, and had to put down 10% and had to pay a 1% premium for the privilege.
Then competition and the property boom ripple effect saw the banks create a range of high risk products, including the ‘low doc’ and the no deposit home loan at no rate risk premium [how dumb was that].

Why the US Home Market, and then the US Financial collapsed

The US homes were over sold on up to 125% mortgages [no printing error, lets consolidate all your bad debts into the home loan] to first home owners with bad credit histories. These loans were ten packaged as security loans to fund managers all over the World [who never bothered to ask about the quality of the borrowers, because they were safe as houses. right?] Those people were also sold into ARMS [ variable rate mortgages] with a starting rate at 2% with a 5 year window, due to hit the fan in 2006 onwards. The result is what we now have.

So Australia’s Banks never directly got involved in this type of lending, but they are suffering the of it.

So Australia’s credit markets are not tight,  the banks are just cleaning up their up their own underwriting standards to what they were.
As the World is now, if we don’t want to  go through a recession, then Banks can’t tighten credit. They will have to be more selective with client acquisition. [selling assets]

When you consider that Commonwealth Bank this year bought a third of non-bank lender and mortgage broker Aussie Home Loans, this may be their way of making money on the looser lending that someone will have to do to keep the housing market firing. Though this is not what the CBA is saying.
If we take out lo doc loans and bad credit refinancing then the housing market and the banks could have a disaster looming because these loans make up a large part of what a lot of brokers do. Without that finance choose, homeowners on tough times may have to send “jingle mail” to the CBA and other Banks.

“Jingle” mail is the sound that is made when mailing house keys back to the bank. Is the CBA expecting to here that sound in their mail soon?

The Commonwealth Bank Of Australia is the first bank in Australia to denounce the no deposit loan as not meeting their new tightened guidelines. But will that eventually come back as jingle mail to haunt them if other lenders won’t refinance their bad loans? Remember the CBA is Australia’s biggest Home Loan lender, so they have the most exposure to falling property prices. With the cost of litigation and home repossession, and then refurbishment and resale of depressed stock, there is only bad news for 100% mortgage lenders should the property values fall 20%.

So is Aussie going to be the CBA’s arms length lender who will carry the can on non performing loans by  churning them to other lenders? Time will tell, but that is what I would be doing. And on the other-hand, if I were another bank, having a “no ex CBA customer policy” would be a smart move in the finance.

Tags: Aussie Home Loans100% mortgage loans, CBA, lo doc home loan, no deposit home loan, no deposit home loans