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A shot in the arm for local lenders

By Phil Naylor

Posted October 1, 2008 09:09:00

The Government's commitment to buy prime mortgage-backed securities is a shot in the arm for local lenders, who have been hit hard by the lack of money in the market as a result of conditions overseas.

By adding liquidity to the market for smaller lenders and non-bank lenders, the Government has recognised the importance of a competitive mortgage market and the role that these lenders play in giving consumers choice.

It is important to understand that what has been happening in the United States is not a true representation of what is happening in the Australian market.

Our banking system is sound and the rate of arrears is still relatively low, but the US market has had a significant impact on Australian lenders and investment in mortgage-backed securities in Australia.

The credit crunch has been particularly difficult for non-bank lenders because, unlike banks, they don't have consumer deposits to fund their lending activities. They rely on residential mortgage-backed securities to stand alongside the big banks and offer competitive mortgage products to borrowers.

In the past six to 12 months a number of lenders have exited the mortgage market or scaled back their operations due to the simple fact that the credit markets internationally are so tight.

In recent months, the big banks have reclaimed a share of the mortgage market that hovers around 90 per cent. This has been at the expense of non-bank lenders, whose market share has been capitulated by the lack of funding available.

This new initiative will enable non-banks to get their hands on funding that hasn't been available for the past six to 12 months and consumers are set to be the big winners.

Non-banks play a vital role in applying competitive pressure on big banks. More lenders means greater competition as all the players aim to convey their point of difference - whether it may be a lower interest rate, greater variety of products or better service.

When the Australian lending market was deregulated in the 1990s and non-banks entered the market, competitive pressure forced banks to drop their rates by around 2 percentage points.

While there is a lot more than just interest rates to take into account when selecting a loan, the instant benefit of lower rates is of clear benefit to consumers.

For the past six months the Mortgage and Finance Association of Australia (MFAA) has been campaigning for the Federal Government to ease the pressure on the lending market by offering securitised sources of funding.

A few months ago, the House of Representatives Standing Committee on Economics hosted an inquiry into competition in the lending sector. The inquiry acknowledged the need for a diverse lending market to increase the number of home mortgage products available and offer a wider choice to the consumer.

The Government's purchase of $4 billion worth of mortgage-backed securities goes some way to satisfying this need, providing a welcome reprieve for the short term survival of non-bank lenders.

But to ensure the sector's future the Government has to look beyond the short-term fix and identify the long-term solution. Until the lending sector secures additional, reliable sources of funding we can expect fewer players, fewer options, and the consumer will bear the ramifications.

Phil Naylor is the CEO of the Mortgage and Finance Association of Australia (MFAA).

Tags: business-economics-and-finance, consumer-finance, economic-trends, banking, international-financial-crisis, australia

Comments (93)

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• Errol:

  01 Oct 2008 9:39:49am

  What is most money lent for? If it s for a 'home' - somewhere for a family to live - then it should be available at low, fixed- interest rates. If it is for speculation, which is euphemistically called 'investment' it should be available at a higher rate. This might go some way to providing stability and security in our obscene real-estate culture.

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  • Green:

    01 Oct 2008 10:30:28am

    Yes, we should punish those who try to develop a portfolio of investments so that they can self-fund their retirement...
    

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    • hugh jampton:

      01 Oct 2008 12:01:41pm

      It's not a question of punishment it's a question of priorities. Various Australian governments (and the people who voted fro them) have already decided that home ownership (somewhere for the family to live) is a priority, hence we have already grants to first home buyers. (Unfortunately these tend to skew the price of houses upwards by the amount of the grant.)
      
      While investing for one's future is also important, there are many options other than real estate for such investments. So a higher interest rate for loans where the property is an investment does not punish anyone, it merely shifts the ground rules for investment.

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      • Green:

        01 Oct 2008 12:36:11pm

        Levying different interest rates depending on whether a loan is for owner-occupier or investment purposes would act to punish investors.
        
        Consider the case of a family purchasing two small properties, one to live in and one as an investment. Compare that to a family purchasing a McMansion to live in. The total value of each family's properties may be identical, but the latter would be the one to see the benefit of lower interest rates.
        
        In this instance, the family who chooses to make a sensible choice for their future (rather than wanting to have it all now) and who, in so doing, also provides a rental property for another family to live in, gets penalised.
        
        There is no way the goverment should become involved in trying to levy different interest rates on different categories homebuyers - it is an issue best left to the market to determin.

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      • hugh.jampton:

        01 Oct 2008 2:34:01pm

        No one is forcing investors to invest in real estate - it's their choice out of many options. Thus, they can easily avoid the higher interest on investment properties, and any 'punishment' (your word not mine) is self-inflicted.
        
        In any event, the interest on investment properties is tax deductible - this is itself government intervention in the market. If you that demand that the free market determine such things, then you should also demand that tax deductibility of invetsment loan interest should be halted.
        
        
        
        

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      • Juno:

        01 Oct 2008 3:54:44pm

        But if the only people encouraged to buy homes are owner occupiers, where does that leave renters? There's already a huge rental shortage, wouldn't making it less attractive to purchase rental properties make it...well...less attractive to purchase rental properties?
        You understand that, like, people live in these 'investment' properties, right?

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      • investment mentality:

        01 Oct 2008 5:41:32pm

        Quite a few supporters here of the property investment mantra.
        
        I understand your desire to have a comfortable retirement, but should it be at the expense of new entrants who just want to raise a family in their own home?

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      • SFA:

        01 Oct 2008 4:56:19pm

        Yes Hugh
        
        Punishing an enterprising person who wishes to make an investment for the long term so as to self fund their retirement and thus not be a burden on society by claiming the pension is an extremely good idea..........NOT!!!

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      • Somewhat Perplexed:

        01 Oct 2008 2:46:44pm

        Gotta love that term - leave it to the market to determine.
        
        If the market was so wonderful then there would no need for any legislation to mould it into place whatsoever. The market has been given an increasingly free reign over the last 30 years and for our efforts there are more alienated people then ever.
        
        Moving to real world - the market is not going to decide this kind of thing.
        
        It is great at driving efficiency but crap at providing social justice. And even then it all too often drives efficiency at the expense of quality.
        
        

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      • no more tax breaks:

        01 Oct 2008 5:38:18pm

        About 8 percent of investors use tax breaks to build new dwellings for renters.
        The other 92 percent use tax breaks to outbid genuine home buyers at sales and auctions.
        
        It is a stretch of the imagination to say that investors are doing the right thing by the wider community. 8% are, the rest have effectively disenfranchised a whole next generation.
        
        The only thing I agree with you is that here is no way the goverment should become involved, at least not in matters related to tax breaks for investors. The community has had enough of discrimination against home buyers.

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      • NT boy:

        01 Oct 2008 2:18:34pm

        Many people use their first home to invest in a second home.. usually the home they wish to retire into ..they then rent this home out at cost for negative gearing while slowly renovating it.. - hence lower rents for the renter. It would not be a good idea to have these people pay higher rates than single home owners - there is a separate investment loan already in operation in Australia that is comparable to normal home loans but requires collateral of both homes.

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      • lower rents my foot:

        01 Oct 2008 5:47:45pm

        Negative gearing is aptly named.
        
        It has been anything but positive for the society in general.
        
        As to your comment: "hence lower rents for the renter". Which country are you posting from or describing? Could not be Australia. Last year interest rates went up 1 percent, rents anything between 30 and 50 percent. Pure greed.
        

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      • WayneG:

        01 Oct 2008 5:54:45pm

        Disagree with Green, I firmly believe that the home should be exactly that, and not considered an investment - investments do involve risk, but the risk is a calculated one and must (like anything else) be affordable.
        
        The home should be fixed low interest - like they used to be, and I think with other incentives (i.e. investment tax incentives) it is not unreasonable to have a higher rate for investment - and guess what...that is exactly what happens.
        
        In relation to housing, it should be noted that without people investing in property, the rental markat gets more restricted and rents rise. Like most things there are two sides to the story that need to be considered. It is also not unreasonable to get a return on your investment, noting that unless you are positively geared you still have a deficiet after the rent is in to pay for the mortgage (this is part of the risk and the affordability side of the equation).
        
        And yes, I do invest in property, but I also feel that real estate agents and lenders have a lot to answer for in the housing affordability debate, they have in effect, destroyed the Australian dream for many and adversly impacted on the Australian culture.

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    • Tony Grant:

      01 Oct 2008 2:37:08pm

      Show me anybody that hasn't used the taxation system to buy there way to their "large nest egg" They have never been punished, they are small market players that purchased "bricks and morter"!

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    • make tax system fair:

      01 Oct 2008 5:30:07pm

      No need to punish investors.
      
      Simply remove the ridiculous tax advantage investors get from a skewiff tax system.
      
      $300k mortgage debt now generates about $450k of tax concessions over the life of a loan. Little wonder homes have been bid up to unreal levels. Govt could start with removing negative gearing and stop subsidising investors.

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    • Pen Pal:

      01 Oct 2008 6:45:49pm

      Gee, you're a spoilt sport Green - fancy anyone trying to avoid being on the generous Government pension scheme?

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      • Nigel:

        01 Oct 2008 7:38:54pm

        Negative gearing makes renting a houses affordable for those people and families who cannot afford to buy a house.
        
        It also helps those people who prefer credit card debts and personal loans for expensive cars rather than buying a house.
        
        Without negative gearing, household rents would be comparable to commercial rents and would increase by the amount of their current tax deuctions.
        
        Keating tried it in the 80s and rents skyrocketed. If you want the rent of a 3 bed house in a capital city to average $800pw - remove negative gearing.

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  • Id:

    01 Oct 2008 3:50:56pm

    What most people,indeed most so-called experts don't seem to understand is that the majority of listed companies are operating normally.
    It is only the companies in the money market and peripheral markets that are panicking.Of course the large superanuation fund managers and bank investment managers are shivering because of their appallingly bad investment decisions.
    John Howard's" mums and dads" who have sensible equity portfolios are safe.
    If they have paid over the odds for equity shares, it's no different to betting too much at the races,but the share price is NOT an indicator of how the company is performing.
    The only true indicators of performance are the balance sheet and the profit and loss statements If they are trading normally, they are in no trouble.
    It is about time the vociferous "financial columnists" took a deep breath and an aspirin.
    If the money market operators are making a mess of it,blame the merchant bankers.
    
    

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  • phoile:

    01 Oct 2008 4:03:36pm

    negative gearing is a blight that young prospective home buyers have to bear. Spending the inheritance well disguised!

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    • tax rort yes:

      01 Oct 2008 5:52:42pm

      agreed negative gearing is a blight. even worse is, or was, interest only loans. they have sucked the life out of the wider community, benefiting a small number of investors.
      disagree that the inheritance is being touched by negative gearing though.

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    • WayneG:

      01 Oct 2008 6:03:28pm

      You are kidding right???
      
      "...spending the inheritence..." So what? I earn it with my parter, and I spend it as I see fit, my obligation as a parent is to ensure my kids are stable, happy and able to make there own way in the world - all done whilst I am still alive. If they get an inheritence than that's a bonus for them, but it is not as you imply, a right.
      
      Everyone starts off the same, the choice is yours as to what you make of it, but don't winge if you've stuffed it up, and certianly don't live your life relying on an inheritence (you'd have more luck with a lotto...)

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  • FloogleHorn:

    01 Oct 2008 4:31:50pm

    My dad was a WWII vet who got a 'war service loan' at a fixed rate of 4% obver 40 years. There was no other way this poor, damaged workuing class man could have given his five kids such a great start in this country. He is a TPI pensioner now, but in a comfortable home.

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  • worm in the flower:

    01 Oct 2008 6:21:40pm

    True Errol. Property should be a home, not some kind of speculative commodity. Many investors seem to struggle with the role they have played in our collective downfall.

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• Jim:

  01 Oct 2008 9:43:35am

  Interesting isn't it that the government suddenly has $4 Billion to buy mortgage securities, but hasn't got the funds, for health, pensioners or public transport. The love of money is the root of all kinds of evil.

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  • NT boy:

    01 Oct 2008 10:17:27am

    you prefer a large number of people to lose there homes because the non bank lenders fail? - great thinking that

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    • Doh:

      01 Oct 2008 10:51:12am

      People do not lose their homes because the lender goes broke. The mortgage continues.

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      • Bullfrog:

        01 Oct 2008 11:21:30am

        Not necessarily. If the lender goes bankrupt, the people who supplied money to lender will want the assets. It is up to the creditors to decide whether to sell the asset (in this case the partial share of the house), or to accept the mortgage as an ongoing income stream. It'll depend on how desperate the creditors are for the money.

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      • Doh:

        01 Oct 2008 1:41:27pm

        Not in Australia. The mortgage is no more than a charge against the title. Home loan mortgages are not redeemable at the will of the lender. The mortgage continues.

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      • NT boy:

        01 Oct 2008 2:21:23pm

        If the creditors are overseas banks then they have the option of forclosing or forcing a sale on a morgage. - this is why ppl including myself, were worried when RAMS were in trouble a few years ago. - Hence my morgage change to CBA.

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      • Doh:

        01 Oct 2008 3:57:18pm

        No. For a start the lender doesn't ever get title under the Torrens system so there isn't any such thing as foreclosure as it is known in the USA. Secondly, there is no such thing as redeeming a loan without a default by the borrower.
        
        There was nothing non-standard about the loans from RAMS.

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    • Jim:

      01 Oct 2008 10:57:41am

      The inference is entirely yours. Of course I don't want people to lose their homes. My point still stands.

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  • Adam:

    01 Oct 2008 10:45:30am

    That's because with $4b of securities comes big fat interest payments. The taxpayer will profit from this.

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    • Kathy:

      01 Oct 2008 11:33:24am

      So you think the govt. should run a business?
      
      You should also think about services and communities (ie. health, pensioners or public transport).

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      • Adam:

        01 Oct 2008 11:54:18am

        That's exactly what the interest payments could be used for.

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      • Bullfrog:

        01 Oct 2008 11:58:29am

        I'm not disagreeing with you, however a few points to consider:
        
        The current economy is built with, among other things, an ease of access to credit. That ease of access is drying up. This will slow the economy.
        
        In a slowed economy, revenue to pay for hospitals etc will not grow. So in real terms the amount of money being spent on hospitals etc will shrink (actually dollar amount will remain constant, but inflation will eat away the real value).
        
        So, the desired effect is to provide the financial lubrication required to maintain some growth (or at least prevent the economy from shrinking).
        
        The process may work, it may not. But not doing anything would lead to higher interest rates, as the banks will need to source their money from third parties (international credit market), which is setting an increasingly higher interest rate (eg the cost of money to the banks is rising, so the cost of money to us is rising). The theory is that $4 billion from the government is $4 billion that the banks won't have to source from elsewhere (at a premium).

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  • constance:

    01 Oct 2008 3:42:58pm

    Now now Jim! Surely you are joshing!
    If you click onto ALP website & check out what the Government has put into "health, pensioners" etc. since they were elected 10 months ago, you might be suprised. I am one of those "most disadvantaged" pensioners - single female, private renter, live in rural area etc.etc.etc. & I am very grateful for what the Government has done so far. I can certainly do with more, that is for sure, but I think it is time for the general public to stop whingeing and whining for handout after handout and get on with life.
    So some of us are doing it tough! Wear it!
    If you do not understand what the Government is trying to do about inflation and the economy then maybe it is time to get some education on the matter.
    signed- sick of the whingers.

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  • they lack social conscience:

    01 Oct 2008 5:55:46pm

    Exactly, Jim. Public infrastructure is not a priority. Just run down the hospital, schools, pensions etc. As long as the rich parasite end of the system is bailed out, that is the main thing. Good riddance to them i say.

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• ram:

  01 Oct 2008 9:44:19am

  The government 'printing money' to bail out bad mortgages does nothing to help average working Australians. What is does do is cause inflation, erase the value of savings, and ultimately further reduce savings and money available for lending. It also damages the bond market as potential bond purchasers can all see that the government intends to inflate its way out of debt.
  
  In the short term, of course, it is a great deal for some politicians mates who will no doubt convert their ill-gotten gains into a hard currency or physical material assets. No one is fooled, this is just looting the treasury like some third world African country!

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  • NT boy:

    01 Oct 2008 10:16:08am

    It helps keep money available for lower / middleclass people who want to buy a home. people who the banks reject because of economical situations - (most of the time wrongly)
    I was one - I was earning enough to pay a house off - had a deposit but the bank took into consideration the rent i was paying - and added the morgage costs to that.. instead of replacing it.. a nonbank lender lent me the money and after 2 years i transfered the morgage to one of the banks that rejected me in the first place. Without any change to my employment situation. - I now have a home.. without these lenders many ppl would be still in the rental roundabout.

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  • Andos:

    01 Oct 2008 11:39:27am

    Did you even read the article above?
    
    Do you understand what the Government is doing here?
    
    Because all of what you have said is ludicrous and baseless.
    
    The Government is not printing money, nor is it bailing out bad mortgages.
    
    The Government is simply buying high value, 'prime' mortgage backed securities from non-bank lenders so that they can continue to offer loans to compete with the 4 huge banks.
    
    In all likelyhood the Australian taxpayer will profit from this move, through a stronger and more competetive lending market and through the intrest payable on these securities.
    
    Maybe you should think about what you say before you bloviate rediculous fictions.

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    • banks not dumb:

      01 Oct 2008 6:08:41pm

      Q: Why is the Government buying high value 'prime' mortgage backed securities from non-bank lenders?
      
      A: Could it be that the banks will not touch them with a barge pole?
      
      Banks may behave in morally bankrupt fashion, but they are not dumb.

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  • constance:

    01 Oct 2008 3:48:04pm

    Here we have another member of the public misinterpreting what is really happening!
    Either you are intentionally trying to badmouth the Government or you just don"t know what you are talking about.
    signed - give me strength

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  • punish savings:

    01 Oct 2008 6:03:13pm

    Good description ram.
    
    The focus has been on the US debt mess. The fact has come out that US is in debt to China for about $10Trillion (from memory). Look into the books of any banks in Aus and the story is much the same.
    
    Govt, rather than encourage savings is going full throttle to encourage inflation and more debt by throwing petrol on the fire.
    
    Meantime, the effective tax rate on bank savings is about 80%. Little wonder we are about to go down the tube.

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• m1scha:

  01 Oct 2008 10:01:46am

  I hope this isn't a shot in the arm for local lenders with a $40 million mansion on the harbour to maintain. Perhaps the government should actually do the lending, after all public servants salaries aren't all that different to those who want the loans. Unlike the CEOs of companies that crashed and burned in the US. And I would like to know what cut the CEOs of Australian companies get as well.
  
  Once there were Terminating Building Societies, as distinct from Starr Bowkett, where the funds were operated by the State Banks. Interest rates were about half the going rate, once the loans were repaid, the society disappeared. Now there are no state banks, and no Terminating Building Societies, and not many of those who need them can afford the loans.
  
  I heard David Koch say we may need to get back to the days when a 25% deposit was needed to buy a house, well with rents what they are today, no-one will ever buy a house, because they will never save the deposit.

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  • Jim Bendfeldt:

    01 Oct 2008 10:31:26am

    Nationalise the Commonwealth Bank!
    
    ....and while the Federal Government is at it, we'll have Telstra back as well!

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    • NT boy:

      01 Oct 2008 11:02:29am

      The Commonwealth bank is the most secure of the big 4 - Nationalising it would be a backward step for everyone involved including the tax payers who would fund the buy back.. you got a spare couple of hundred billion under your bed?

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      • Jim Bendfeldt:

        01 Oct 2008 11:29:03am

        It should never have been privatised in the first place. If it were still in government hands, we would at least have one major bank passing on the Reserve Bank's cuts to interest rates, and forcing those banks paying out millions to their CEOs to follow suit.

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      • NT boy:

        01 Oct 2008 12:05:27pm

        Should they run corner stores as well? - and hotels and motels? They are a government, not a commercial business. They govern they dont involve themselves with commercial operations.

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      • NT boy:

        01 Oct 2008 12:15:28pm

        No - we would not, because it would have to be run as a commercial venture and do exactually as the other banks are doing now.. and we would most likely not have the rules in place that has protected Australia from the USA situation as the other banks would have demanded more flexability than the commonwealth bank had.

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      • Doh:

        01 Oct 2008 1:46:36pm

        A government enterprise that provided home loans would most certainly not need to be run as a commercial venture. The Federal government ran Telecom for years as a non-commercial venture. We even had a government aircraft factory.
        
        Then the economists managed to convince cash strapped governments that selling off the silverware was the right thing to do, and we've been stuck with that mindset ever since.
        
        

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• Lament:

  01 Oct 2008 10:05:57am

  The funding is a good place to start but...
  
  Will it be revolving facility? If not then $4 billion does not go very far; who and how will the paper be traded to maintain a market of funds?
  
  A keener issue may well be whether mortgage insurance will be available; that market has just about dried up unless we are going to be satisfied with lower rated insurers.
  
  This is a good first step but to maintain a markket is going to require more than just a 'fund' it will need a secondary market as well as appropriate insurers, unless the fund is limited to standard loans which is almost a misnomer in recent markets.

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• Dave:

  01 Oct 2008 10:21:14am

  If they were serious they would drop the 4 pillor policy and allow market forces to dictate.

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  • hugh jampton:

    01 Oct 2008 10:42:27am

    And we'd end up as screwed as the USA, what a great idea

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    • Dave:

      01 Oct 2008 11:14:17am

      Unlikely, as our regulatory requirements and banking system is different to the USA.
      It would put pressure on interest rates through competition.

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      • Chris:

        01 Oct 2008 11:46:28am

        ...but you just said you wanted the regulations and system to be changed!

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      • boris:

        01 Oct 2008 12:56:41pm

        Competition is good. But not when it is so competitive that banks go broke.

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      • DeepFritz:

        01 Oct 2008 2:04:50pm

        Do you see any of our 4 big banks going broke in a hurry?
        
        Maybe the NAB came closest with their cowboy investors, but even then they were reporting big profits.

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  • Doh:

    01 Oct 2008 10:53:23am

    No. We need more prudential regulation, not an open market.

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• Bertrand:

  01 Oct 2008 10:26:32am

  Didnt the government bag out Malcolm Turnbull last week when he suggested this very thing? They told him that the Australian economy is quite different to the American one, and that they would be no need to do this.

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  • Bullfrog:

    01 Oct 2008 10:52:02am

    There's a slight difference between the two:
    
    America - buy bad debt, to get it off the books.
    
    Australia - buy good debt (eg backed by an asset, good income stream, etc), to allow the banks to lend the money.
    
    If this is done correctly (big assumption that one), the government should end up ahead (as mortgages earn more interest). Further, as banks suddenly have access to credit again (roughly 4 billion dollars worth), they won't have to borrow that from the rest of the world (at high rates), and thus should insulate us from non-RBA interest rate rises (to a certain extent).
    
    Essentially all that is proposed is to turn a long term income stream (eg me paying off my home loan) into a bundle of cash that the bank can then lend to you, for your home loan. As opposed to the bank borrowing the cash from a third party (at high rates, as the number of institutions willing to lend is diminishing), to then lend to you.

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  • Doh:

    01 Oct 2008 10:54:12am

    That's what I heard. Strangely the media has been very quiet on this issue.

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  • NT boy:

    01 Oct 2008 11:06:49am

    No, Turnbul wanted to give the money to the banks.. this is making money available to home buyers.. totally different.. the money is spent on home purchases and not going into the banks revenue pool which could end up in shares or currency purchases overseas that doesn't help us 1 bit.

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    • Spank:

      01 Oct 2008 11:54:04am

      No NT Boy, what Swan is doing now is exactly what Turnbull was riducled by the government for suggesting. If you watched Q and A this is what he was describing. It's about injecting the money to help out non bank lenders. Swan has done a straight copy.
      
      I'm not the biggest Turnbull fan but he knows what he's talking about when it comes to financial markets.
      
      

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      • Andos:

        01 Oct 2008 12:56:14pm

        This wasn't Turnbull's idea, neither was it Swan's.
        
        The Government passed legislation allowing them to do this much earlier this year.

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      • Spank:

        01 Oct 2008 1:13:53pm

        Andos the point i am making is that Turnball was ridiculed for making the suggestion. Now Swan and Rudd have realised it was actually a good one.

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      • NT boy:

        01 Oct 2008 1:11:54pm

        Actually if you look at the last Turnbul interview he agrees this is a better policy that the one he offered up.... although bagging out the Government for doing it.

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      • Gonan:

        01 Oct 2008 1:14:06pm

        "If you watched Q and A this is what he was describing."
        
        His powers of recollection are alarmingly poor then because If you listen to his original statement he does not once mention non bank lenders.
        
        Also, it is acknowledged that Swan's scheme has been planned for months.
        http://www.theaustralian.news.com.au/story/0,25197,24415571-33435,00.html
        

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      • Spank:

        01 Oct 2008 1:43:58pm

        NT Boy and Gonan, when Turnbull first suggested this he said it in the context of nutting it out with the government - no explicit detail, the governement tried to ridicule him for suggesting such an irresponsible action. In the Q & A program he was questioned a bit more deeply and gave up more thoughts on how he thought it should work.
        
        Now Swan claims it as a great government initiative. Very hipocritical or he had no idea what Turnbull was talking about and reverted to his labor mantra's only to realise that Turnbull idea had merit (likely after having it explained to him by advisors).
        

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      • Gonan:

        01 Oct 2008 1:59:00pm

        But Spank, it is acknowledged that Swan's scheme has been planned for months!
        http://www.theaustralian.news.com.au/story/0,25197,24415571-33435,00.html
        And has been mentioned already, this government introduced this legislation earler this year for just this purpose.
        Turnbull tried to make out the idea was his but the facts just dont back him up. Turnbull is a fraud.

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      • Spank:

        01 Oct 2008 2:15:27pm

        So Swan and Co bagged their own idea as "economically irresponsible". Confirms to me even more that Swan, Rudd and Gillard really have no idea what to do.

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  • Aus, bigger than US:

    01 Oct 2008 6:14:41pm

    Aus is different from US.
    
    We have a much higher per capita private debt than the US.
    
    The Liberal Labor Party (no real difference these days) has encouraged massive debt in Aus through a discriminatory tax system that rewards debt. The more debt the better. Until now. Run for cover when the truth comes out.
    

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• dhome:

  01 Oct 2008 10:34:09am

  Listening to ABCs interview with Treasurer Swan about 8.00am this morning nearly drove me mad. The financial reporter kept on harping on about a broken business model as the reason why non-bank lenders can not access money to lend to borrowers. For his (and any other poorly informed commentators) please read and understand the following:
  1. Banks are not and have not been lending to each other, without demanding up to 3% higher rates than central banks, for the last 3 months. They dont trust each other enough!
  2. This situation is worsening with financial institutions now unable to secure overnight funding from peers or central banks.
  3. Central banks (incl the RBA) are injecting huge amounts into their banking systems BUT because banks do not trust each other, they are hoarding the money and to improve their damaged balance sheets or , in Australias case their required prudential reserves.
  4. As lending institutions cannot borrow money from banks; they are turning to the very short terms offered by the money market funds. This line of credit has to renewed very rapidly overnight. The first major British Bank to collapse, Northern Rock failed because it could not do it quickly enough.
  5. Eventually, unless the situation improves, the only funding available will be overnight, leaving a significant portion of short term financing for the banking sector (and their customers) to be decided on a day-by-day basis.
  6. Depositors are withdrawing their money from short term cash management funds and seeking safety in central bank bonds so the amount of over-night money that money market fund managers can lend is rapidly decreasing.
  7. The only source of funding able to break this lack of confidence cycle is the central banks in Australias case, the RBA.
  None of the above is within the control of individual businesses and thus references to a broken business model merely indicates a Palinesque understanding of both the magnitude and the seriousness of the problem.
  
  Further, this problem is now starting to impact on business line of credit funding, typically monthly or quarterly; with the inevitable result that businesses will start to fail due to cash-flow problems.
  
  If you are lending over 10-30 years but borrowing over-night; you have a problem. You will go broke like Northern Rock, Washington Mutual and Wachovia. Btw since August 2007, the list of gone broke billion dollar plus financial institution is:
  1. USA = 12 incl last Friday the worlds biggest deposit-taking bank Washington Mutual,
  2. UK = 2 and
  3. Europe = 2
  There is, currently, potential for many more failures than these.
  

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  • Shane:

    01 Oct 2008 11:40:12am

    There are two fundamental problems that wont go away no matter how much money and regulation is thrown at the situation.
    
    1. Housing values have become too high to be supported by incomes (Australia is one of the worst countries for this imbalance). This occurred as lending standards became a race to the bottom as the market was made more "competitive". Many current mortgages will never be paid off. When the market value of properties drops below the amount owing many people will choose to walk away. Add in rising unemployment and the situation spirals out of control.
    
    2. The financial system has a fundamental crisis of confidence. Throwing money and rules at the banking industry will not erase this sense of fear any time soon.
    
    We are in for a few bumpy years.

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    • MO:

      01 Oct 2008 11:50:09am

      "Many current mortgages will never be paid off. When the market value of properties drops below the amount owing many people will choose to walk away".
      
      Walk they might but they are still liable for the debt and will likely be declared bankrupt.
      
      In the US, "jingle mail" (where keys are returned in the mail) is as you describe, with the debt being "owned by the property, without recourse to the borrower. This is what contributed to so many NINJA loans.

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    • dhome:

      01 Oct 2008 12:17:47pm

      I agree with that, Shane, except it is not just debt on housing that is the issue. Its all debt - housing, credit cards, municipal, corporate, national deficits - everything.
      Estimates range from 30 dollars to 1000 dollars of debt overhanging every real dollar. That means a lot of asset value destruction - worldwide; to reduce all the credit bubbles that has developed over the last 40 years.
      To put that in perspective: every average American family currently having a net "worth" of US$488,000 will have to loose between 30 and 50% of that wealth over the next 5-10-15 years. The quickest way for this to happen it to allow inflation to do the job by devaluing the worth of the $ so that at the end of the period they are worth around k280-300.
      Australia, with its high levels of per capita personal (higher than the US according to the OECD) and governmental indebtedness will have to go through the same thing.
      All in all; all net borrowers will experience falling living standards over the next decade. Naturally this will cause many businesses which have relied on customers racking up lots of debt; going broke.

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    • Pravda:

      01 Oct 2008 12:24:48pm

      The follow on from this is that as house proces decline, so do rates that Council collect because they are based on biannual valuations, yet most local councils have budgeted on increasing values to bring in a higher revenue stream. Plus lots of them have also lost invested funds becauase they got sucked in dodgy investments by the like of Leaman Bros.
      
      It just seems to go on and on.

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  • MO:

    01 Oct 2008 11:46:01am

    "If you are lending over 10-30 years but borrowing over-night; you have a problem".
    
    This is precisely why Rams failed in Australia.
    
    Plus 286 smaller US lenders already gone bust to .

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• Gresley:

  01 Oct 2008 11:53:37am

  Mr Naylor omits to mention that a major cause of the current credit 'squeeze' is that too much credit was available and given to people who had a poor credit history and who could not afford to repay the loans. How often does one see the sign "no deposit required".
  
  What is happening now is a 'market correction' and one questions whether the Government should become involved. If non-deposit taking lenders fall over there are no depositors who can lose their money. Morgages simply get taken over by liquidators and borrowers simply keep making payments as before.
  
  I think the major beneficiaries of non-bank lenders are finance brokers or middle men who Mr Naylor's organisation represents rather than borrowers or home buyers.

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• Pravda:

  01 Oct 2008 12:17:18pm

  The headline is quite appropriate isn't it. A shot in the arm. The financial markets are like junkies, sweating on where the next fix is coming from. As in Wall Street, they don't care who the dealer is, they just want their next fix of cash.
  
  And like good junkies, they tell you what you want to hear - just give me one more fix of cash and everything will be OK - I go straight, I do what ever you want me to do, but I just need the cash now.
  

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• Lindsay Cooper:

  01 Oct 2008 12:34:19pm

  Our banks and finacial systems don't have much exposure to the problems coming out of the USA.
  
  DO YOU BELIEVE ANY OF THIS YOU ARE BEING TOLD.
  
  Just go back and remember what Bernecke and Paulson, JWB etc. were telling the american people two (2) months back.
  
  Now they have all suddenly become enlightened to the realities.
  
  Think for yourselves, how long before panic and a run on the banks.???????

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  • NT boy:

    01 Oct 2008 1:19:04pm

    Actually, banks in Australia have to show all their investments/loans as a part of our regulations. So if they are affected they have to show it..
    Only 2 have been affected - CBA some $1 mil and ANZ or NAB (Cant remember which) $100 mil.
    Which is a drop in the ocean to what these banks have at their disposal.
    So stop being a panic merchant - the sky is not falling.

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  • Doh:

    01 Oct 2008 1:54:48pm

    You are right. Sooner or later there will be a panic. It won't be based on fact, it will be based on rumour. Those are much more powerful.
    
    What we really need is for financial markets and the forces pushing them up and down multiple percentages each day to either take a chill pill or, if this is a new means of making windfall profits, to have regulators step in to prevent the sloshing around of vast amounts of money.

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• Jim:

  01 Oct 2008 2:01:53pm

  The availability of money is not the issue that needs addressing. The availability of cheap land for building on is the problem.
  
  We have a population not much bigger than the Netherlands, and a country the size of Europe. Why is land the same price as in the UK?
  
  

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  • Green:

    01 Oct 2008 4:08:11pm

    Because people in the Netherlands don't all feel compelled to live in McMansions on huge blocks.
    
    As long as we all continue to want to have both a huge house and land package AND live in close proximity to our major cities, the problem will continue.
    
    

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    • Jim:

      01 Oct 2008 4:24:56pm

      You could be right Green. The other issue of course is that large swathes of land simply aren't available for housing due to artificial interference in the housing market by government and council. investments in property are a bit of a waste if everyone owns a house. Who would pay the rent to offset the interest?
      
      Borrowing to invest is a mug's game. Death and taxes are certain, but why would you choose to pay interest? the answer is easy. You've been conned by the banks.
      
      The only way to invest sensibly is to avoid interest paymets. Get together in a consortium and buy outright. No interest means no desparate need for renters. It also means fewer houses used up as investments, since the investor house relationship is a many to one economic rather than a one to one economic, and it also means that fewer houses are used up as interest earners for banks, and more are houses available on the market for those who need them.
      
      It's not rocket surgery, and yet borrowing to buy an investment property seems endemic in Australia. Maybe people want to give interest payments to banks.