Banks to Suffer When Housing Market Cracks
Banks to Suffer When Housing Market Cracks
ANZ has a $145bn mortgage book. We're told that if house prices fall 20%, interest rates hit 13.4% and the unemployment rate skyrockets to 8.1%, its models suggest it will lose a grand total of $201m. That's 0.144% of the book.
QBE owns Australia's largest mortgage insurer, PMI. It claims that if mortgage arrears increase 15-fold, its provisions will still be 'adequate' and the business will still be highly profitable.
I've been scratching my head about this apparent conundrum for a number of years. There's clearly risk involved if house prices fall – almost 20% of ANZ's loan book by value has a loan-to-value ratio in excess of 80%. But if the banks aren't wearing the risk, and the mortgage insurers aren't wearing the risk, someone tell me who's on the hook?
I'd love to get ANZ's Mick Smith and QBE's Frank O'Halloran in a room and ask them. Absent that unlikely scenario, there's perhaps a clue in NAB's half-year results.
'An increase [in retail provisions] of $142 million during the half to March 2009 represents a decline in the quality of housing and credit card loans. In addition, this increase includes a management overlay raised to cover loans ... where claims may not be met by the lender's mortgage insurance providers' [my emphasis].
Mortgage insurers don't analyse every loan they insure. In fact, they hardly check any at all. All they do is provide the lender with a bunch of loan criteria under which they are prepared to provide insurance. It's the bank's job to make sure the loans qualify. Now that mortgage insurance claims are on the rise – ANZ's number of possesions almost doubled in the past 12 months – the insurers are rejecting claims on the basis that some of the loans should never have qualified.
I've no idea how many claims are likely to be refuted or who is ultimately going to end up wearing the pain. But I do know that, thanks to crashes in many parts of the developed world, Australia stands alone as the most overpriced housing market in the world. And propping up the market with dumb incentives like the first homebuyer's grant is only making the problem worse.
Both the insurers and the banks are going to suffer severely when it comes unstuck.
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Did someone at the Big Four forget to read the fine print?
It's incorrect to say that "Mortgage insurers don’t analyse every loan they insure" I had to deal with Genworth last week (the other mortgage insurer along with PMI) regarding my own loan and it was the Mortgage Insurer who was giving us the most trouble comparatively to the bank. Most mortgage brokers would tell you that, it's easy to get past the banks, the real problem is when the loan gets to the Mortgage Insurers in relation to getting an approval.
That could be true today, Vee. NAB's announcement specifically mentioned that the provision related to loan's written between 2004 and 2006 – apparently the arrangement was an 'open book' policy, where the insurance company's clients were supposed to work out whether a loan met the underwriting standards.
The whole experience probably wasn't fun for you but as an investor I'm glad to hear it's getting harder to get approved.
"if house prices fall 20%, interest rates hit 13.4% and the unemployment rate skyrockets to 8.1%"
Which of these three do you think would be likely to happen first? Unemployment above 8%? We are well on the way there now.
When house prices finally fall 20% across the country, I can't see the RBA lifting rates in a hurry...
When house prices fall 20%, Interest rates hit 13.4% and unemployment hits 8.1% there will be a lot more strife to worry about in the market than a bit of peripheral damage to banks and mortgage insurers.
I'm an ex ANZ lender brought up on much different lending standards than those used in the past few years. ANZ relaxed its standards on how much could be borrowed (read more), its valuation policy (looser), then brought in computer assessment for consumer loans. I believe it also owns its own mortgage insurance company.
The real worry is the stuff that was written by mortgage brokers, all driven by commission. How many business/investment loans were written up as home loans- I'd suggest heaps, This raises more issues.
Could we see a major australain bank insolvent in the next 2 years because of raising unemployment?
Remember 1992 Westpac and ANZ brought to their knees,
because of the collapse of the property market and high leverage buy outs.
Household debt was low in 1992 in 2009 debt is sky high.
This time we have higher leverage and more debt.
Good luck Bank shareholders going to need it.
I attended a conference at the end of last year and the consensus was that one or more of the big four Aust. banks will require serious govt assistance or collapse by end 2010. I cannot say which conference this was, but let's just say that there were very influential analysts attending.
were they the same analysts that warned us about the sub prime crisis?I think it is very difficult to predict with any clarity what the future holds.It is one thing to recommend not holding large ammounts of bank shares it is another to predict imminent collapse.As an aside assuming the banks are going to tumble(or collapse as is suggested)and that perhaps our mining stocks(bhp and rio)are significantly overvalued and may also fall considerably the australian market is in for one hell of a fall and one thing this correction has taught me is that they all go down together
Yes , interest rate at 13.4 % hard to imagine but going forward the pool of global savers ( so far the bigest losers here , incl me ) will arguably have more influence on rates than the RBA or economic circumstances. With Australias big four tapping this offshore market to the tune of approx 50 % allowing Ausies to continue to live beyond their means , funded by others. This at a time when the queue of suitors for this pool is historically long & fronted by the US & UK Govts to fund huge defecits. THE OPERATE ON CREDIT business model is now broken & needs to evolve thru this period into something more sustainable. It is simple demand & supply , the savers will demand a higher premium to part with their hard earned & the highest bidders will attract adequate funds. Developed countries either pay the asking price or accept a lower standard of living that they can self fund. I now expect a prolonged period of lower than average economic growth & investment returns as a result & can envisage rationing of money. Savers/investors enjoy their position thru decades of sacrifice & responsible behavior always living well within their means , so far those least guilty of creating the bubble have been punished the most. Perhaps were entering a new landscape where those long term traits are finally rewarded.
Glen, although this is off the original topic a litle, I hope you are right but I fear the National Powers are more likely to keep the printing presses running overtime and where possible devalue their (and our) currencies to overcome the issues created by living beyond their means. This monetary inflation will erode the real wealth of individuals and the nations we live in. Then all we have left to trade with are our properties and businesses. As we see now large slabs of those are being sold off at low prices because we have spent all our chips and are price takers instead of having any pricing power(eg Oz minerals, Fortescue and RIO). Ultimately I see it as the start of a shift of influence from nations that have been spenders to those that have been thrifty.
It will be interesting to see how everything plays out.
Given how overvalued the Australian property market is I don't know how a young family (on average incomes) could ever afford a property in a major city. If there is no intervention I think property prices will certainly tumble (and I think 20% is a very conservative figure).
However, I don't believe regulators will let that happen. K Rudd has made it clear that he is more than willing to interfere early and often.
David , couldnt agree more & apologies to all for digressing . Lets hope we refrain from the monetary inflation/currency devaluation of printing money. History doesnt support this measure , but desperate people do desperate things.
Steve J , as to your question WHO IS ON THE RISK HOOK ? perhaps there is a clue in the most recent balance sheet of ANZ. Their nett Derivative position has increased by 60 % for the half year & a mind blowing 477 % year on year. What is all that about ? Perhaps this risk resides in the US with AIG & explains the preparedness of Obama & Geitner to keep it alive at any cost. Or do I misunderstand the use of these complex instruments ? Top of my Bank Worry List is financial derivatives followed by commercial property. A global blowup in the derivatives market has the potential to render all of our banks worthless & make events thus far look like light entertainment.
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