The Mortgage Death Grip

Housing Market
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According to British writer Michael Rowbotham, the word ‘mortgage’, in its medieval origins, meant ‘death pledge’ or ‘death grip’. A mortgage was used as a last resort to raise money against an existing property when someone fell on hard times. From his book, The Grip of Death:

Mortgages were regarded with great suspicion, since it was generally goldsmiths employing usury not dissimilar from modern banking methods who supplied the money, hoping at least for a large profit and possibly the chance of ending up with the property.

Doesn’t that sound like your friendly local bank? You buy a nice property against which they can create credit, and you pay them interest for the money they counterfeit out of thin air. ‘If you want to be slaves of the bankers, and pay the costs of your own slavery, then let the banks create money.’ So said Lord Josiah Stamp, former director of the Bank of England. Debt slavery is a profitable business.

A consequence of the debt-based financial system is the way it can hammer down the initial deposit sizes people — especially first home buyers — need to put together relative to the size of their loan. Hence the rise of mortgage insurers who protect lenders from borrowers with this higher risk profile.

One that operates in Australia is Genworth Mortgage Insurance [ASX:GMA]. It listed on the stock exchange this year and reported results yesterday. Does it tell us anything about the Aussie housing market?

Well, based on the results alone, I don’t see any reason for panic. Loan losses are down, attributed largely to low interest rates and stable employment. The company said its average premium is coming in lower than originally expected. That’s a positive for the economy as a whole, because it’s a sign the leverage in the housing market isn’t extreme.

The Australian Financial Review put it like this:

That was evidenced in Genworth’s results as it saw a larger proportion of mortgages with a loan-to-valuation ratio (LVR) below 80%, which kept a lid on the average premium rate. Loans with higher LVRs are deemed riskier and more profitable for insurers.

High deposits are another reason you can probably worry a little less about China’s housing market. Caixon Online reported last week that first time buyers are required to have 30% of the purchase price as a down payment. Second homes need a 60% deposit. This is hardly the stuff of wild speculation.

After all, at the peak of the US housing boom in 2007, properties were being financed 100% on credit. That meant any downturn in the housing market immediately put those buyers in negative equity.

Beijing introduced these regulations in China to tighten up the property market and cool off the speculation in coastal real estate. Bloomberg equates home prices in China to 40 years of average income. If accurate, that’s a heck of a deposit to put together for your average Chinese punter.

Now compare that to the average American punter. Already, the vested interests in the US are watering down the safeguards put in place in the wake of 2008. The US Federal Housing Finance Agency (FHFA) wants lenders to start financing more borrowers, ‘particularly first-time home buyers and those without conventional pay records, according to the Los Angeles Times.

The FHFA is also going to relax rules that protect the underwriting standards of the banks and lower down payments. Currently in the US, 80% of mortgages have some form of taxpayer guarantee, for which most need a 20% deposit.

The New York Times reported this week:

Thousands of potential borrowers struggle to amass the savings to make a down payment of that proportion, and they, therefore, fail to qualify for loans…

As part of a wider effort to increase the flow of housing credit, Mr. Watt [head of the Federal Housing Finance Authority] said last month that he wanted Fannie and Freddie to back loans with down payments as low as 3 percent of the value of the home. He called that effort a “much needed piece to the broader access to credit puzzle.”

This behaviour is exactly what the property clock we use in Cycles, Trends and Forecasts predicts. It’s history repeating. In fact, my colleague Phil Anderson says that that during more than 200 years of US history, there’s only been one major variation in the real estate cycle. And it’s the new ways bankers find to avoid the regulations put in place after each collapse to ensure ‘it will never happen again’.

Starting to sound familiar?

Regards,

Callum Newman+
for The Daily Reckoning Australia

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.
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8 Comments on "The Mortgage Death Grip"

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scottoftheantipodes
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It is interesting how history keeps repeating itself in so many ways. The more that current times are compared to the past the more similarities that one can find. First the concept of serfdom has been introduced here on these pages and now a Medievil reference to the origins of the term Mortgage. Don’t get me wrong, I wholeheartedly agree with the premises being offered here. The real issue that I have is how blind everyone I meet is to the realities of the world that we live in. For some time now I have been regarding home owner grant… Read more »
Nexus789
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The Chinese property market can be viewed in another way. Buyers may have put down a substantial deposit but this may be all of their savings and many of these properties don’t seem to have any rental income stream. If property prices collapse in China a large number of Chinese may see their savings wiped out. Not good outcome in terms of maintaining social stability.

slewie the pi-rat
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like so many living in the US as well as the “living” fictions [the corporations, partnerships, and public-private enterprises], Fanny and Freddie have gone from being: a) ~fine, upstanding, responsible citizens, from the government, and here to help, to b) ~socialists, to c) ~commies, to d) ~gangsters, with .gov “law and bankster connections, downtown”. Fanny and Freddie have been “fixed” but are still not working as part of some moronic “growth” meme, primarily b/c of the crappy job situ, nosediving real incomes, and people who are still not back on their feet after the last fiasco w/ the banksters, gov’t… Read more »
Jason
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Aging old China will probably end up with a housing shortage when their population begins to decline, but they have a point in regard to a deposit. In America and Australia their was no deposit (subprime), and even now the greedy real estate industry and the mob dons in parliament still promote the debt slavery of high priced mortgages to the populace. What happens when Johnny and Sonya Middle Class CAN’T PAY? The problem with Australia is ‘exceptionalism’. The faith that moolah will flow from 100 year mining booms and property booms so long as we bow and scrape to… Read more »
Laoyan
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The Chinese market is difficult to understand as it is no way of knowing what exactly the government is doing. In theory the People’s Bank of China, the central bank controlled by the government is entiled to issue as much money as the Chinese government wants. But in reality there has been in place some kind of agreement with the American government (therefore the Federal Reserve Bank of America) in which the Chinese government can only print their RMB in proportion to the printing of the American dollars, thus tying the fortune or CHina’s sovereighty of issuing money to that… Read more »
Big Bubble trouble in little china
Guest
Big Bubble trouble in little china

See the China websites –
parents put in the 30% deposit in China for FHBs and pay 50% + of income.
Also reduced to 30% for 2nd investment apartments in October 2014 – this 60% level is out of date.
So the deposit is borrowed on the first property –
40 year payback = Ponzi scheme as the payments effectively never pay off…

Big Bubble trouble in little china
Guest
Big Bubble trouble in little china

Also china has a massive shadow banking system and developer credit.
Don’t believe this is a rock solid 30% deposit culture.
A massive credit bubble (at 20% interest), massive overbuilding –
China property can easily drop 20 % (which is just the last 2 years growth).
What is the knock on to Australia, where the Chinese buyers are the highest paying buyers (at several Auctions I’ve seen in Melbourne lately for example) with an extra $ 200k.
What goes up CAN go down…

Big Bubble trouble in little china
Guest
Big Bubble trouble in little china
And as for GWA – what is the model if prices go down here 10 %. If they can go up 10% in a year (for 10 years) this could happen for a year or 2. What if 1% extra unemployment, and those investors cant finance as no income to negative gear any more. Or even if the govt actually does something about the tax lurk subsidies for housing for the wealthy investors. GWA has no capital here – its ring fenced in Australia LMI business, – it just closes the local branch. So then the 10 % loss flows… Read more »
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