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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State of the Home Loan Market & the Australian Economy

It’s interesting to note that although home loan interest rates have recently been dropped by a quarter percent that the state of the property market is still poor. Why is this? It’s pretty simple really, not only have home loan interest rates increased substantially over the last several years but the cost of fuel and inflationary pressures have had an impact too.

When you combine these factors and the flow on effects of higher fuel prices which trickle down to the food we buy and other goods which require transport to reach the retail sector there is a considerable amount of strain placed on the household income.

What was once ‘disposable’ income has now become essential to simply maintain a reasonable lifestyle and in a lot of cases put food on the table.

So when will this all change? Not for a while yet, although the home loan interest rate has decreased for the first time in several years there is simply not enough income liberated from this to breath life into consumer confidence levels.

The market will bounce back as it always has done although this will take several months to occur, what we will see is the RBA (Reserve Bank of Australia www.rba.gov.au) cutting interest rates in the new calendar year two to three times. Once this happens there will be enough income liberated for people to start feeling confident in opening their wallets and spending again.

The flow on effect will be felt in the retail sector and in the property market, jobs will be created and money will start to flow within the economy again.

What this means for the home loan market is an increase in overall enquiries and home loan settlements. Time and time again I have seen this occur in the industry and with every downturn there is an eventual upturn, it is a matter of when not if and it all comes down to time and timing of economic factors which all have an impact.

Aussie Wise Finance Group has been through the ups and downs of fluctuating economies and will again be there when the market moves into positive territory. To find out about me and my organisation simply follow this link to www.aussiewisefg.com.au or you can give me a call to have a chat.

Bookmark this blog as I will be regularly updating it with market goings on and will run a special in a few weeks on the sub prime crash or as is known in the industry the current ‘liquidity crisis’…. More on that soon….