Brief Report on the Home Loan Lend­ing Round­table

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To its credit, the House of Rep­re­sen­ta­tives Stand­ing Com­mit­tee on Eco­nom­ics, Finance and Pub­lic Admin­is­tra­tion decided to hold an “Inquiry into home loan lend­ing prac­tices and processes”, in the form of a one-day round-table dis­cus­sion with inter­ested par­ties.

They invited a diverse group: all the major banks were asked, as well as rep­re­sen­ta­tive of non-bank lenders, mort­gage insur­ers, val­uers, com­mu­nity rep­re­sen­ta­tives, reg­u­la­tors, and yours truly. We were asked to con­sider four top­ics:

  • To what extent have credit stan­dards declined in Aus­tralia in recent years?
  • Have declin­ing credit stan­dards caused an increase in the num­ber of loans in arrears and the num­ber of repos­ses­sions?
  • Are bor­row­ers in finan­cial dif­fi­culty being treated appro­pri­ately by lenders?
  • Are declin­ing credit stan­dards likely to have any long-term impli­ca­tions for the Aus­tralian finan­cial sys­tem?

Need­less to say, a diverse range of views was expressed on all top­ics. But the com­mon­al­i­ties were sur­pris­ing. In gen­eral, the banks and the RBA took the Dr Pan­gloss position–everything is for the best and there is no sign of prob­lems ahead. The com­mu­nity groups, espe­cially those pro­vid­ing legal aid to dis­pos­sessed mort­gagors, were pre­dictably Cas­san­dras. The sur­prise was where the mort­gage insur­ers, val­uers, and even one repos­ses­sor stood: they were with the Cas­san­dras.

You might expect that these groups would have sided with the banks–after all, their liveli­hoods are bound up with the lend­ing process. And Nick Greiner, when there rep­re­sent­ing one mort­gage insurer, did argue that this was just another credit cycle, and there was no cri­sis afoot nor off­ing. But oth­ers asserted that things were every bit as bad as the com­mu­nity groups were say­ing, and that a sys­temic cri­sis was likely.

I put it to one par­tic­i­pant dur­ing a break that their posi­tion reminded me of accoun­tants dur­ing the 1980s boom and bust. Dur­ing the boom, they were lent on by shonky cor­po­rates to cook their books to make them look profitable–the clas­sic period of “cre­ative account­ing”. Then in the after­math, they were sued for fail­ing in their pru­den­tial duties.

Not only did he agree with me, he also recounted sto­ries of nascent law­suits by the banks against val­uers when loans had gone wrong, and said that he expected banks to legally pur­sue val­uers for their per­sonal indem­nity insur­ance once the hous­ing down­turn became severe.

The Com­mit­tee will report back on Sep­tem­ber 17–not all that long away, but in the con­text of cur­rent events in global credit mar­kets, a lot could hap­pen between now and then. The full tran­script will form part of Hansard, and will be avail­able shortly; I will post it here when it becomes avail­able.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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