To its credit, the House of Representatives Standing Committee on Economics, Finance and Public AdministrationÂ 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.Â 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.