On March 13 2008 JP Morgan and Fujitsu Consulting released a new report entitled “The JP Morgan/Fujitsu Australian Mortgage Industry Report for March”. The report is based on the results of telephone interviews with 26,000 Australian households, and follows decisions by the major banks to increase their standard variable home loan rates by more than the 25 basis point increase of the Reserve Bank on March 4. Some key findings of the report include:
- More than 700,000 households will be experiencing some form of mortgage stress by June this year, a four-fold increase on last year;
- Around 300,000 households will be experiencing severe stress, meaning they will have missed repayments, be in the process of refinancing or have received a foreclosure notice;
- A rise in “affluent stress” of high net worth borrowers suffering from rising rates, school fees and share margin calls;
- Bank methods testing for financial stress are questionable, given that credit bureaus only collect data on impaired credit records, as opposed to the total amount of debt held by individuals; and
- Rising interest rates impacting borrowers’ capacity to repay, coupled with tighter global liquidity forcing lenders to ration credit, likely signals subdued housing growth expectations over the near term.
The report also called on the banks to review their use of mortgage brokers to win market share and to make mortgage processing more efficient.
Also released on March 13 2008, a report entitled “Protecting Wealth in the Family Home” by the Australian Securities and Investment Commission. This report examines the risks for homeowners of inappropriate refinancing in response to mortgage stress. The report analysed the practice of “equity stripping”, where “fringe brokers” refinance vulnerable borrowers in financial stress into loans they cannot afford, in order to earn substantial fees. Some key findings of the report include:
- Two fringe brokers reviewed in detail charged fees to borrowers of more than 20% of the existing equity in their homes, with a highest fee of over $24,000;
- These fringe brokers refinanced borrowers into interest-only loans for one or two years with high up-front costs. Such loans provided, at best, a short-term solution. In some cases borrowers could not afford the repayments on the loan, and are sold up by the lender before the completion of the loan term;
- Such inappropriate refinances cost the borrowers a minimum of $20,120, through the brokerage fees and lender costs associated with the loan; and
- Borrowers could enter into a series of refinances until the equity in their home had been exhausted and was insufficient to support a further loan.
The report provides an insight into how borrowers can make poor refinancing choices, and how brokers and lenders can improve the outcomes for borrowers under financial stress.