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.