Global Liquidity Crisis & The Australian Home Loan Impact

Months ago we heard reports from the US about how lenders were impacted greatly due to the high level of defaults and the growing amount of mortgagee auctions. People were losing their home; they were crying out that the bank sold my home from under me. On the other hand the lenders were crying poor too saying they had to sell to recoup losses.

The reality of why this occurred lays equally on both the lenders and the borrowers shoulders, firstly the lenders were providing finance to borrowers on a low doc basis (low documentation) where evidence of income is limited to non existent and also providing in excess of the homes valuation by way of borrowings. For example if a house were worth 300k the lenders would often lender 320k on the property.

This would leave the borrower in a negative equity position along with the banks!

In saying that, some responsibility must be taken on the borrowers behalf as well. Common sense should prevail but rather than do some basic math on what’s owed versus the value of the home, most borrowers would be happy to put themselves in a negative equity position.

Now there are many reasons that lenders did this ranging from keeping up with the Jones’ and having that new SUV or Plasma TV to borrowing good money after bad to continue to make home loan repayments which simply created a vicious cycle of debt on debt.

The one question many forgot to ask is ‘Can I actually afford this?’ it’s also a question that the lenders should be asking too.

Many months down the track, the ramifications of these poor lending practices are being felt around the globe. In particular the Australian market has suffered a major slow down in the property sector with interest rates increasing and lending policies tightening up dramatically.

This is not such a bad thing although people are asking ‘Why are we suffering because of what the US lenders did?’ This is a fair question to ask too, with the answer not being as clear as one would think.

The reality of why there is a global liquidity crisis is that because if the actions of US lenders and their lending policies the securitised lending market has collapsed. Securitised simply means that an investor has cash funds they are willing to invest which will be secured against property.

The direct impact of the US property and lending crash has seen investors flee the market and the ones who remain have placed strict parameters on whom, where and how much they will lend. From an investors perspective this is a logical way to react and I personally would be doing the same thing.

So how come it has affected Australia’s lending policies and home loan market? Simple, funds which were once available to invest in securitised lending are now all but gone, this has restricted the options available by second tier and non bank lenders. The funds which are available to the market nowadays is coming at a higher cost based on perceived risk which has been driven by the negative US economy and in particular the home loan and property market there too.

My company has seen these changes occur over several months now with many non bank lenders and mortgage originators closing their doors and or merging with other companies to maintain economies of scale.

Unfortunately the home loan market and Australian borrowers are suffering as a result with the impact of higher interest rates and reduced capacity to borrow as a direct result of this. As a flow on the property market has slowed down although we are not seeing the regression we had during the ‘recession we had to have’ in the early 90’s.

There are signs of life again and in the next blog I will be touching on these signs and highlighting areas to look for as an indicator to better times ahead.

For information on home loans and the latest interest rates hop onto my company website which is www.aussiewisefg.com.au and stay tuned to my regular blogs for updates on the financial state of play.

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