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The Forum > General Discussion > Reserve Bank leaves interest rates on hold as Feds sit on a mortgage relief plan

Reserve Bank leaves interest rates on hold as Feds sit on a mortgage relief plan

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I can't help but feel embarrassed and increasingly angry each time I hear Kevin Rudd or Wayne Swan talk about mortgage stress.

Although they say publicly they are doing everything they can, for six months now they have been sitting on a mortgage relief plan to that would cut the Reserve Bank rate hikes over the same period in half (in fact a little more).

I understand the need to control inflation, but the brakes are hitting hardest on housing finance, which does nothing to control the cost of food or fuel. It just makes it harder, more expensive and less likely for people to keep a roof over their heads.

If you think this is a problem, a petition was launched today demading action on the plan that is sitting gathering dust on Wayne Swans desk.

You can find it here: http://www.ipetitions.com/petition/mortgagerelief/index.html

What are your thoughts?
Posted by mortgageinsider, Tuesday, 6 May 2008 6:47:35 PM
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The prime drivers of inflation this time are fuel,food State Govt taxes and charges.Fuel and food are relatively inelastic, ie people have to buy it in order to survive.Putting up interest rates will not stop OPEC from increasing the price of crude nor West Farmers or Woolies who almost monopolise the market,from doing likewise.It is not wages driven.

Over the last few yrs we have seen our living standards fall dramatically under the guise of the need for environmental restraint,which was an absolute con.Aust has plenty of energy,food and resources.We have a $ trillion GDP or we produce $50,000.00 pa for every man woman and child.Where has all the wealth gone?

The real reason for the rate increases is to prop up the banking system which invested badly in Sub-prime mortages in the US.Capitalise the profits and now socialise the losses by increasing interest rates!The RBA is complicit in this con,since they have given the green light to the banks to increase rates at will.This also conviently takes the heat off the RBA.

Aussies should be very angry,since not only do we give away our energy and resources for a song,we now have to suffer the indignity of paying for the poor decisions of our greedy banking system!
Posted by Arjay, Tuesday, 6 May 2008 8:31:16 PM
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Totally agree Arjay, hence the plan which actually takes margin out of the finance sector and puts it back into the equity of home owners.

Begs the question as to why the government is standing idle.
Posted by mortgageinsider, Tuesday, 6 May 2008 8:42:21 PM
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Over the past 10 years or so we have all taken advantage of cheap debt to an extent that we have now borrowed far more than we earn. We don't get rich by spending and consuming, we get rich by producing and selling. The chickens have now come home to roost because we have all been living beyond our means, borrowing to speculate in houses, the stock market, derivatives and just plain luxuries. Well I'm afraid the party is ending. Get used to it.
Posted by snake, Wednesday, 7 May 2008 5:26:14 PM
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Arjay,

Australia since at least the 1980s has been the wealthiest nation on the planet [not the largest econony] [Philip Kotler citing the World Bank]. This measure is Gross ASSETS/population:thAT IS is asset wealth, not income.

In the US, the exposure to sub-prime mortgages is much higher than Oz. We are in a better position with regards unproductive mortgage exposure. Our today are experiencing liquidity problems and some bad loans.

In 2009/10, they will have the problem of receiving lower raes on deposits while paying higher raates on term deposits lodges now. Perhaps, that is why the Banks have broken away from closely following the RBA's direction?

About 3-4 years ago, the US administration decided to let Housing take the brunt of the US downturn, rather than the USD. Since then both have happened.

Australia is in minerals boom and it has trade surpluses with both China and Japan. Historically the trade weighted value of the AUD:USD has had the AUD over parity with the USD.

The greater wealth is probably going to those rich enough to invest in the first place. I once asked Peter Costello what Australia's ideal Ginni Co-efficient [a measure of welth distrubution] should be and he would not answer me.

There has not been a full census of Australia's wealth distribution since 1915 [The churches, I think, attempted a big sample try about a decade ago].
Posted by Oliver, Wednesday, 7 May 2008 5:28:28 PM
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Snake,

Whilst I totally agree that we don't get rich spending and consuming. I also agree that credit has been cheap for quite a long time, which has lulled much of society into a false sense of security. However, I don't agree that 'speculation' is the right term for many people buying their own home who are affected by the current rate situation.

Buying a home is a more of a cultural tradition rather than investment speculation and on that basis, I argue that there are a great deal of people who deserve some sort of assistance if it is possible. The mortgage relief plan requires a very small public investment for a large community benefit.

In current rate conditions, a significant number of ordinary people find themselves under a great deal of financial pressure as a result of the culmination of a number of other economic factors. It is my view that these people should be entitled to help if it is available.

The mortgage relief plan shifts margin away from the lenders and over to the borrowers. Whilst I hear the lenders screaming about the need to raise rates, the reality again, is that there is not a single lender amongst them that is facing any real loss.

The consumer in this case, rather than the shareholder, is picking up the cost of business practice undertaken by their lender.

Unlike luxury items such as wine and dvds, the house is already purchased and for all intents, iliquid. The loan contracts are inevitably riddled with discharge, penalties and deferred establishment fees so under the current structure, the consumer is somewhat trapped.

Most of the people I am talking about here, and there are large numbers of them, undertook a complex loan agreement and trusted, to some extent that the lender would take care of them. Regardless of whether, as an educated person you consider this foolhardy, my question remains that if we can shift some of the margin away from the lender to these people to buy them relief, why shouldn't we? Surely you couldn't be that mean spirited.
Posted by mortgageinsider, Wednesday, 7 May 2008 6:45:47 PM
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Oliver you missed the point.Our financial system did invest in the US sub-prime debacle and now with the blessing of the RBA,we ordinary people are paying the price of a waywould banking system.

Can any small business in Aust make poor decisions and expect it's customers to pay more because of their atrocious decisions?
Only our banking system gets away with because of the backing of the RBA,World Bank and our own gutless Govt.Why should not the share holders suffer come grief,instead of ordinary folk losing their homes,jobs and busineses?

Don't try to deflect the reality I've painted.John Howard proudly proclaimed last yr that we have a $ trillion GDP,now you would beg to differ?Divide one million,million by 20 million and the answer comes out at $50,000.00 for every person.Even if we give half to the the multi-nationals,that means that every person should earn $25,000.00 pa,or every family should have an average income of $100,000.00.

Don't try to peddle me the BS unproductivity of the Aust economy.The lowering of tarrifs mean the lowering of our living standards to match that of China and India.That is the reality!

It is interesting that Kevin Rudd has just taken $20 million from the budget of our bureau of statistics.Perhaps they don't want to hear the truth either!
Posted by Arjay, Thursday, 8 May 2008 12:37:13 AM
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Arjay,

Why the attack? I agree with everything you said, except we are not as exposed as the US. Oz and the US have hundreds of billions of dollars of cross FDI. Th US sub-prime will create enormous problems.

The world central banks will try to protect to USD because its FDI when repatiated to home will be worth less, say on non-US transnationals balance sheets.

Because US retirement funds must invest a portion of their funds in the few Sovreign AAA rated countries around the world and there is an Australian minerals boom, I predict parity before the NY; the Banks say March 2009.

China will US companies to remain sustainable until there the possibility of take-overs, like with Rio Tinto in Oz. This will take decades and trillions of dollars.

Yes, Oz home values could fall as repayments go up. Yet, much wealth will still be in the hands of Baby-Boomers in their million dollar, low mortgage, properties. Both will loose out on the house balance sheets, but, as happened in Japan in 1980s, equity could be less deby. I think Japan now has intergenerational mortgages [need to check].

NB: I have worked on an ABA working committee reporting through Bob White to Bernie Fraser. I predicted the present world economy two years ago in a fairly heated exchange with the Chief Econonist, HSBC, Hong Kong. He disagreed. He didn't undrestand maturityn transformation; strange for a senior economist.

Then again, it was a Weath Seminar and the Chief Economist couldn't really agree in public with many millionaires in the audience with money to invets in the HSBC.
Posted by Oliver, Thursday, 8 May 2008 2:16:38 AM
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Gidday Oliver!

I'm sure Arjay will respond for himself, but understand the reaction as this is a relevant and sensitive topic, which is why I've raised it.

Regardless of who forsaw the economic situation or who is to blame, or what's a symptom and what's a problem, shouldn't we be actively exploring and developing solutions?

Isn't the government heavily, if not ultimately responsible for social and economic stability?

Doesn't it seem reasonable that if the government has a mortgage relief plan, that it should be at the top of their list right now?
Posted by mortgageinsider, Thursday, 8 May 2008 10:44:47 AM
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if we can shift some of the margin away from the lender to these people to buy them relief, why shouldn't we?
How would you propose it be done?
When banks won't loan to other banks is the dilemma, money being lost in Australia by get rich quick individuals, I will not cry about. The least they must learn to read/understand contracts. The world is full of fraud.
fluff4
Posted by fluff4, Thursday, 8 May 2008 11:18:24 AM
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Thanks Fluff4,

There's not enough space here to explain the detail. Essentially essence the plan helps transfer part or all of ongoing commissions to borrowers.

Visit the proof of concept at www.matesratesmortgages.com.au.

Whilst there are a number of complexities associated with this model, they are resolvable. Mates Rates is in it's third year of full blown operation although concept trials started in 2002.

Challenges for increasing competition amongst this model include that most brokers can't access lenders directly. It takes huge lumps of money, expertise, technology and business volume to do this. This is why Plan Australia and Aussie John et al exist. (Aussie John built his $50m house with this exact margin - 40% to 60% of commissions, whilst screaming, "we'll save you" no less!)

The mortgage relief plan creates a co-operative middle layer allowing the benefits of commissions to flow to the borrower, without compromising the broker financially.

Another interesting point you raise is the loan contract. The plan includes a component for better consumer education and other protections.

Although it's inappropriate to call complex and costly clauses fraudulent, it is doubtless this complexity befuddles the borrower at a time when they are vulnerable and pressured. As Eastern Access Community Health stated, "the reliance on disclosure as a primary consumer policy has failed". Information is overwhelming. When you don't know what you don't know, it is difficult to spot the catch!

Consequently, borrowers go with what the advertising leads them to believe, which does not usually align with reality.

These are complex issues, however the mortgage relief plan that the Government has sat on since 2007 goes to reasonable lengths to explain and address the what, how and why of it all.

If it is too complex or not complex enough for them to act, you would expect they would at least do what you've done and asked 'how'.

The problem is, they are either not listening to the people, they do not care, or the people aren't loud enough. Hence the petition.

Please sign up and pass it on.
Posted by mortgageinsider, Thursday, 8 May 2008 12:26:21 PM
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"Isn't the government heavily, if not ultimately responsible for social and economic stability?" - M.

I can remember a lecture by one Professor Michael Parent. After a chalkboard [182] of equations, the result was Government controls about one-third of the economy. Moreover, public servants were far, far [thank Mr Dickens] less efficient than than private sector workers.

In the eighties, before academia, I worked for on the funding side of the Bank and setting interest rates in concert with a few other people. Not mortgages. Folks in the street usually see their own mortgage and creit cards today's/this pay week's situation, the person setting the rates needs to consider maybe one hundred products, competition, PR and importantly maturity frofile of its term deposits: One needs to consider what might happen daily per day over four years. Much more complex.

If the Banks push lending rates now and have high deposit rates too, they will pay for it in two of three years' time when the reates fall and the high rates are still being oaid to depositors. Well billions now might become losses. Well its their own greed.
Posted by Oliver, Saturday, 10 May 2008 4:41:21 PM
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mortgageinsider,

What needs to be looked is whether Banks are providing unused limits [amount customers overdraw]to corporates. Wherein, funding provision is made but not necessary drawn-down: Hundreds of millions of dollars. A good example are limits provided to the big international wheat/wool brokers. Perhaps, the provision should be re-allocated. Moreover, Banks because they have been able to depreciate buildingd/property over decades, often show undervalued properties' worth.

It is easy for your local branch turndown a request for $200,000 to a home borrower. But what about BHP asking for $200 million at what insiders call a "shaded" rate. MNCs don't pay the rates we do on loans or foreign exchange.
Posted by Oliver, Sunday, 11 May 2008 8:33:39 PM
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Hello Oliver.

With respect, I must disagree. Whilst there are a range of initiatives that could be looked at, the prioritisation should reflect need, feasibility, impact, time frame and cost.

There is a real plan to reduce the cost of mortgages available to the government today and this has been the case since 2007. It directly affects every person who has a mortgage and indirectly affects many more, including tenants of landlords that have mortgage finance on the property. It offers precision rate relief to the mortgage only and rolls back at least 50% of this years RBA increases. It can be implemented immediately at a cost to government of around $700,000. So why the delay?

Some aspects of the plan already operate on a modest scale, however can be grown and further competition should arise. The key challenge to growing the plan is that the main dividend of the plan flows through to the borrower. There is simply not enough cash return in it for private investors, and social benefit does not inspire them.

Whilst you continue to introduce tangential concepts to demonstrate an impressive intellect, education and experience, you detract from a simple discussion on inaction on the part of government, on a what is a very real problem for many Australian families.

With mortgage costs high on the pre-election campaign priority list, it is completely unreasonable that the people have borne further rate hikes coupled with a complete absence of solutions from the government, not withstanding the one that is sitting right under their noses.

mortgageinsider.
Posted by mortgageinsider, Monday, 12 May 2008 11:06:11 AM
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In the old climate, when banks never raised their rates independently of the RBA, your general punter could get some idea about the direction of rates by looking at inflation figures, RBA governor comments etc. You also knew when the board met and likely timetable for interest rate movements.

In this new environment, why would anyone get a variable loan? You have no idea how exposed these private companies are to the sub-prime problem, no idea how much they value customer base compared with shareholders, no idea what level the banks will decide on a whim to increase their interest rates (possible using sub-prime as an excuse), and on what timeframe.

The ledger really needs to be evened up. The most important thing that needs to be done is to outlaw exit fees, so the lender actually has a realistic risk that the customer will switch to a better rate if they increase their interest rate.
Posted by Usual Suspect, Monday, 12 May 2008 1:15:48 PM
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Thanks Usual Suspect,

The majority of borrowers still opt for variable rate loans. Whilst uncertainty exists around rates increasing, it also exists around rates falling. RBA comments are as relevant today as they always have been. A key difference however, is lenders have broken ranks with RBA rate changes and nobody has done anything to pin them back. Although ANZ was the first to break ranks, the others shortly followed.

Even putting aside exit fees, the lack of real competition has allowed this situation to manifest. Remove exit penalties and the borrower is still hobbled by the absence of real competition. In the unlikely event that these fees are outlawed, the cost will simply be ‘reorganised’. For example, the exit fee you raise is one of many that gained a spurt of popularity following legislation of Compulsory Comparison Rates (or CCR). The CCR attempts to facilitate simple comparison of credit products. The theory was that, by legislating lenders to include actual interest costs and fees, consumers would then have a fair benchmark.

Whilst there are numerous issues with the legislation, perhaps the most glaring is that lenders only have to include ‘ascertainable fees’. This allows lenders to conceal a range of fees as ‘unascertainable’, thereby leaving them out of the CCR. Exit penalties are but one of these fees. The list is long and dubious. i.e. one prominent non-bank lender (which is owned by a bank!) only ‘sometimes’ does valuations ergo valuation fees are not included in the CCR. The moral of the story is you cannot legislate these fees into extinction. Lenders will outmanoeuvre the legislators, as they have in the past.

The mortgage relief plan in front of the government since 2007 dilutes the cost in time and money to vote with your feet. The plan is the culmination of six years of specialist study of the mortgage market. In the very least, government should use the plan as a talking point rather than doing nothing.

Let’s get them moving and sign the petition so we can get enough numbers to show the issue is important.
Posted by mortgageinsider, Monday, 12 May 2008 2:50:16 PM
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Competition would be great, but I don't hold much hope. I hear Westpac is about to buy StGeorge. I think eventually we will only have one bank in Aus.

Does anyone know how we can increase competition in Banks, Telecos and Supermarkets? What is the effect of letting more foreign players into the market?

Does anybody know what's stopping the big four banks from all just increasing their interest rates by 2% and blaming sub-prime? I can imagine when the RBA does lower interest rates, the banks wont pass it on.
Posted by Usual Suspect, Monday, 12 May 2008 3:12:09 PM
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Regardless of whether the Westpac takeover proceeds, a single bank Australia is a very long bow to draw.

Australia has 10 foreign banks following deregulation of the banking industry over a decade ago. The obvious effect has been to increase competition. However that does not automatically translate to pricing competition. As per my previous comment, lenders actively compete on hiding fees and shifting terminology as well.

In the last 6-7 years, pro-borrower innovation has been scant. Although lenders will argue otherwise, most innovation simply facilitates higher debt. This help borrowers spend more, but does little to reduce cost.

Pro-borrower innovation is limited to the abolition of restrictive conditions for professional packages. This means rate discounts to more borrowers in exchange for a bite at other product opportunities like credit cards and insurance.

However, competition has heated up amongst mortgage brokers. Besides comparison and facilitation of mortgages, brokers are also sharing income with borrowers on an ongoing basis, monitoring lender performance and facilitating switching when the lender drops the ball. This sector has the greatest latitude available to benefit the consumer and stimulate competition.

Whilst there are several factors encouraging this, perhaps the most significant is number of small businesses vying for business in the mortgage broking sector. There are only around 120 mortgage lenders and some 12,000 mortgage brokers that compare and arrange loans with these lenders.

Unfortunately, rogue operator have emerged in the absence of a strong regulatory framework and policing. Although these operators are the minority, it is difficult for consumers to identify and avoid them. This has also allowed regular media vilification of the sector.

In terms of why lenders have not simply jacked rates by 2% in one go, I suspect the answer is backlash risk. After all, 2% of say a $300,000 loan is $6,000 - a great incentive to overcome market inertia and early exit penalties. Why would lenders expose themselves to such a risk, when they can march forward incrementally and moderate the risk?

The question is why, with this alarming trend, has nothing been done to moderate or stop them?
Posted by mortgageinsider, Monday, 12 May 2008 5:12:36 PM
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Every decade or so, the HSBC looks at taking over Westpac. St. George would help Westpac's corporate portfolio. In which case the government should allow one only super-merge to compete with major league, NAB + ANZ. Westpac and the CBA would stay Oz or regional banks. Westpac has failed its mission become The Estern Pacific Bank and acquire West Coast US Banks [it's goal 1982].

Seems the new Westpac MD wants buy back her old turf and [known] executive staff {?}.
Posted by Oliver, Monday, 12 May 2008 5:25:34 PM
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And the thread comes full circle.

That's a big 'if' Oliver. It is difficult to see how consolidation of power helps the consumer generally.

Swan has vowed to increase competition in the banking and home loan sector to stimulate better outcomes for consumer/borrowers. Whilst I am completely uncertain how much control the government is actually able to exert over such a merger, it flys in the face of the governments commitments to voters.

Will they do that? Well, I guess they're already heading down that path which is how this thread began in the first place. It seems the fee paying, mortgage burden voter continues to be left out in the cold.
Posted by mortgageinsider, Monday, 12 May 2008 5:42:49 PM
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"That's a big 'if' Oliver. It is difficult to see how consolidation of power helps the consumer generally." - Mortgageinsider

Fully agree. I wouldn't give it more than a twenty percent chance. But there are those in power who would like to see Australia have a "intrenational" bank. It's not anti-trust here, rathter being a player over there.

Westpac had to take on-board the Retail ruins of CHAMP [Cahse-AMP]. Overseas Banks have not had a good record here. Albeit, the HSBC, Banque Nationale and the Bank of China have potental. When at Westpace, we often made a conscious decision Citibank's so called "innovative" products, that may have seen consumers find their way into trouble.

Were the government to intervene, we would all the pin-stripes running around crying, "Socialists", "Socialists", "Communists"!

I don't agree with exra rate rises outside the RBA and never did it myself and pretty the guy you handles loans side didn't either.

The banks in 1980/90s did have credit scoring systems and were quite prudent. Well Credit Policy and Risk assessmenty. The Board is another matter.

In the 70s, when the finance company IAC {?} collapsed andthe shareholder value of the Banbs [for no other reason] dipped. I suspect the banks will acquire the sub-primes via securitisation, before relieving us.

Share price is the first concern. I have seen the Westpac's Board minutes. If fact, there is much, much less narrative than one would think. Pages and pages of amounts and goals. The stragic plans are articulated at the GM level and below.

Mortgage relief could be allowed through the tax system but this budget is going to be tough as we all know. Normally, I am not in favour of government intervention in the free market; but, it might be better than having loans exceeding equity, if things get out of hand.

Perhaps "term" should be more flexible and set against the capacity to pay, say 30-40% of net income?

More later.

Cheers.

O
Posted by Oliver, Monday, 12 May 2008 6:44:20 PM
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