Monday, October 06, 2008

Mortgage Lessons From Down Under: US Politicians Were Wrong to Pimp The Homeownership Fraud

Lessons To Learn From Mortgage Lending in Australia:

Maybe only a friendly foreigner could say this. But America needs to realize that not everyone can own a home. The American Dream of home ownership for all is a fraud. Politicians who pimped this dream created an unsustainable mortgage industry whose collapse is only surprising because it didn't happen earlier. America's mortgage industry will not recover, nor deserve to recover, unless it is prepared to challenge this politically unpalatable reality.

Now, Australians -- and others -- place a high value on homeownership too. But they are aghast at the dumb things America has tolerated in pursuit of that goal. Even more dumbfounding is that nobody in Washington seems to be talking about fixing it.

~Editorial in today's WSJ by Australian journalist

The editorial points out some significant differences between mortgage lending in the U.S. and Australia - the U.S. has nonrecourse, 30-year fixed rate mortgage loans, typically without prepayment penalties, and we also passed the CRA, and all of these uniquely American features of mortgage lending serve to "stack the cards against lenders and in favor of risky homeownership." And it's safe to say that all or most of these pro-borrower, anti-lender mortgage policies in the U.S. are government-mandated.

In contrast, mortgage loans in Australia are recourse, so "When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn't cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It's a neat way of reminding Australians to borrow responsibly."

Australian mortgages have either variable rates of interest, or fixed rates for periods of a maximum of five years, and they face a prepayment penalty when refinancing a mortgage to compensate the lender for the "lost interest the loan would have brought in had it been carried to term."

Bottom Line: One part of fixing our credit crisis is to consider reversing the pro-borrower, anti-lender mortgage policies in the U.S. Moving towards the Australian system would go a long way towards solving our mortgage troubles, and would stabilize our credit market and banking system and make them less vulnerable to credit shocks in the future.


10 Comments:

At 10/06/2008 9:19 AM, Anonymous Wall Street pimping said...

http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

Asked what role the credit default swaps play in this financial disaster, [UCSD economist] Frank Partnoy tells [Steve] Kroft, “They were the centerpiece, really. That’s why the banks lost all the money. They lost all the money based on those side bets, based on the mortgages.”

The result is a huge shadow market that may control our financial destiny, and yet the details of these private insurance contracts are hidden from the public, from stockholders and federal regulators. No one knows what they cover, who owns them, and whether or not they have the money to pay them off.

One of the few sources of information is the International Swaps and Derivatives Association (ISDA), a trade organization made up the largest financial institutions in the world. Many of them are the very same companies that created the vast shadow market, lobbied to keep it unregulated, and are now drowning because of unanticipated risks.

ISDA’s CEO, Robert Pickel, says there is nothing wrong with credit default swaps, and that the problem was with underlying mortgage securities.

 
At 10/06/2008 9:32 AM, Anonymous Anonymous said...

As I understand it,Australia also has a unique method of assessing homes for tax purposes. The owner assesses the home himself and pays taxes on that value. The government has the option of purchasing the home for the described amount, if it thinks the assessment is too low.

Practically speaking, this means that homes are assessed at somewhat below market value, because government cannot buy up and flip an ndervalued home without transaction costs.

It also means the owner cannot complain about his assessment.

RH

 
At 10/06/2008 9:34 AM, Anonymous RebelRenegade said...

Correct me if I'm wrong, but most mortgages in America ARE recourse (although I think they recently passed some legislation at the end of last year giving people Mortgage Forgiveness on the imputed income portion of defaulting on your mortgage).

I believe non-recourse mortgages are a state to state issue, with states like California being non-recourse (big surprise).

 
At 10/06/2008 9:48 AM, Blogger juandos said...

"When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn't cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It's a neat way of reminding Australians to borrow responsibly"...

Hmmm, I'm guessing that the modern day eqivalent of the Copper Heads would be screaming that such a policy would be in some bizzare way, 'racist'...

After all it was this same crowd that defined redlining as illegal and gave us the CRA that is the root cause of what we are seeing today...

 
At 10/06/2008 12:40 PM, Blogger Steamboat Lion said...

"As I understand it,Australia also has a unique method of assessing homes for tax purposes. The owner assesses the home himself and pays taxes on that value. The government has the option of purchasing the home for the described amount, if it thinks the assessment is too low."

I don't know where anonymous got this from. In 20 years as a homeowner in Australia I never came across this.

When I moved to US and discovered 30 year fixed mortgages I thought I'd died and gone to heaven. I couldn't for the life of me understand why anyone would want an ARM instead. Of course the answer is to buy a house they couldn't afford and flip it in 12 months because prices were going up. I don't give my sympathy to people who lose money gambling.

 
At 10/06/2008 4:29 PM, OpenID sethstorm said...

One part of fixing our credit crisis is to consider reversing the pro-borrower, anti-lender mortgage policies in the U.S.
Not going to happen with that language. Now if you get rid of the house-flippers from any recovery plan, then things can (otherwise) resume normally.

At least the flippers are suffering for it. However, Wall Street still is in need of it.

 
At 10/06/2008 9:31 PM, Anonymous alex said...

How exactly would we go about "getting rid of" house flippers?

Also, to the main post, wasn't the CRA aimed at traditional banks, and not lending houses? Not that it makes it any better, but I'm starting to think it isn't quite the scapegoat that we all once thought it was...

 
At 10/07/2008 3:36 AM, Anonymous bokonon said...

As an Australian, I plead with you not to judge all Australians by the terrible article by Janet Albrechtsen. ( We love her even though she is special.) For a better overview of Australia's situation read Steve Keen http://www.debtdeflation.com/blogs/

Even with our supposed advantages our property bubble is bursting now. We over-lent too. In fact our Federal government is about spend AU$4 billion on cash for trash. We are definitely not in a position to lecture.

I cannot speak for all states, however in the state of Queensland the property tax is based on the land value of the property which the state of Queensland determines. It is levied to pay for mostly trash, roads, parks and libraries but not schools. (I pay AU$2K per year on land valued at AU$150K).

 
At 10/07/2008 10:17 AM, Anonymous Anonymous said...

What's wrong per se with long-term fixed rate loans? There's no law against them in Australia, just a bank cartel that colludes to not make them available. Australia's banks are safe and profitable because they've been bleeding consumers white for decades with variable interest rates, add on fees, entry fees, exit fees, transaction fees, and exhorbitant credit card rates. Australia, population 21 million, owes 40 billion in personal credit card debt. So don't look to us as a beacon of virtue, we've been on a spending binge for more than a decade, fuelled by, you guessed it, equity pulled out of ramped up property prices. Our time will come. We deserve it no less that our yankee mates.

 
At 11/11/2008 2:00 PM, Blogger Forrest Cutler said...

OK - spot on. NO, not all people in the US should own homes and the programs were put in place to allow that. It's not just enabling poor and lower class people to buy a home - it had to do with over extension of credit to middle class...and even upper class...

We can get out of this mess here in the US. I am a mortgage professional helping CREDIT WORTHY people find the lowest mortgage rates available.

There are plenty of deserving folks who should still get decent financing but are paying the price of others actions.

 

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