Good news – it seems we’re getting more lending competition.
Bad news – it seems we could all be on the hook for it.
Last week news filtered out that the government were preparing to back smaller lenders in the securitisation market.
What does that mean? Imagine a lender wants to lend money, but they have none. So they raise money by selling mortgage securities to investors; they take that money and lend it to a borrower who wants to buy a house.
As the borrower pays interest, the lender takes a cut and the investor is paid a distribution. Fantastic, everybody wins, right? No, because this only works if the borrower can keep paying, and paying on time.
This is why smaller lenders can’t lend at the moment – investors have no faith their money or returns are safe. As was discovered in the US, the only way you can truly open up lending is by lowering lending standards and lending to riskier customers.
Securitising mortgages went bad on a huge scale and they’re now seen as terrible business… remember sub-prime?
Enter our government, now backstopping lenders issuing these securities – in the name of competition. Now before I’m accused of any bias, this seems to have the stamp of both sides of politics.
The investor cannot lose in this scenario, which means small lenders will be able raise money and push it into the housing market, right at a time when financial magazine, The Economist, calls our market 63% overvalued.
Now, if the economy or the housing market takes a turn for the worst, the investor doesn’t lose, the lender doesn’t lose, the homeowner probably loses his house, and the tax payer foots the bill.
After the disaster in the US, have we already forgotten that shifting risk to government is no encouragement for sane behaviour?
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we ‘re one of only six fiduciary financial advisors in Australia.
