What the Aussie Banks Aren’t Telling You

What the Aussie Banks Aren’t Telling You

Suddenly the Aussie market takes a turn for the worst, and everyone is an expert on the doom and gloom.

Listen here mainstream press.

I’ve been doomy and gloomy for almost nine years.

You can’t come and muscle in on my turf.

I mean, it’s almost like they’ve cottoned to the fact that things aren’t ok…

Is this THE crash?

As property prices tumble most are asking where it will stop.

Melbourne is down 10% from its peak.

Sydney houses are worth 14%.

The rest of the major cities don’t get much of a look in mainstream analysis. Simply because analyst on the east coast have a habit of forgetting there’s other cities in Australia.

But there was no panic then.

However suddenly the two biggest cities in this island nation crumble and the headlines have you on high alert, that the Economic Armageddon has arrived.

Is this the property crash we were all expecting? Or is the property market taking a breather, before an even bigger bull run?

Or worse…is this THE US-style subprime housing crash we’ve all feared?

Probably not.

Don’t get me wrong, things in the property market will get worse before they get better.

But there’s a much bigger problem with Aussie banks.

One you probably know nothing about…

The $120 billion question

Talk of the crash appeared once again in the mainstream press yesterday.

Once again, the mainstream were asking if our interest only loans in Australia were the equivalent to the ‘NINJA’ subprime loans in the US.

There’s $500 billion loans in interest only loans that will reset to principle and interest over the next five years…and $120 billion of that begins this year.

Meaning mortgagors will find their payments jump significantly higher as they now begin paying back the principle of the mortgage as well.

Given that banks have reduced the amount they are willingly to lend and that house prices are falling, there is a risk that not everyone will be able to refinance their existing mortgage.

And it may even increase how many people default.

In saying that, AMP economist Shane Oliver was quick to point out that subprime and interest only loans aren’t the same time. Many of the NINJA subprime loans were lent to people with ‘no income no job and no assets’ (NINJA).

Here, our interest only loans probably went to people who could prove they had some sort of income. Although, the Royal Banking Commission showed that not all of the loans were above board.

However Oliver says that interest only loans and subprime loans are two different beasts. Mainly that subprime loans people could simply hand their keys back and walk away from the debt.  

That’s because the US have non-recourse lending for home loans.

Meaning at any point, people can walk away from their house and the debt, rather than pay the mortgage back.

It was this ability to walk away from the debt that compounded the fall in houses prices and the associated problems in the US banking sector.

In Australia, it’s different.

We have recourse lending, that means at any given time people are responsible for the total debt outstanding.

We can’t hand the keys back.

We can’t walk away from the debt.

Even if the house is reposed by the bank…and they sell if at a short fall to the loan outstanding, they will still chase people for the difference owed to them.

Yet that has created an entirely different problem.

One investors can’t see…

What you don’t know

Just how many people are facing financial hardship?

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Go on, guess.

And I do mean guess.

Because the truth is, we don’t actually know.

You see, Australian banks must report to APRA when a loan is 90 days in arrears with no payment.

Once a loan goes this long without a payment, it’s unlikely the bank is going to see any money for it.

For now, the Reserve Bank of Australia has Aussie banks total non-performing assets for housing at around 0.9%. Which puts it on par at the peak of the financial crisis.

That means less than 1% of all mortgages with Australian banks are more than 90 days in arrears.

On the surface, this gives officials at the RBA and APRA something to cheer about.

They — and other analysts — will trot out this figure as a way of saying that Aussies aren’t in financial distress.

However, what about the data you can’t see?

See, Aussie banks are only required to make public the loan that went bad after 90 days without a payment.

But all those loans that haven’t seen a payment for a month, or two? Well that doesn’t have to be reported to the authorities…

Nor do the numbers of people making partial payments either.

If a person can’t make their full repayments, they are referred to the financial hardship team. And the financial hardship department is more than likely to work with a customer to get some payment.

After all, cents on the dollar is better than total default. If people are willing to make some payment rather than none, the bank will work with that customer for as long as possible.

But here’s where it gets dangerous for investors.

We have no idea how many people are in financial distress.

None.

Because the banks don’t publish that information.

They will advise in their year financial statements the percentage increase or decrease of loans in arrears.

But they never disclose the number of people or the total dollar value amount of how many Australians aren’t making regular mortgage repayments.

Which means investors don’t actually know how many banks loans have gone bad…

One-in-eight in distress

The danger in the Aussie market isn’t interest only loans.

And a US-style housing market crash is highly unlikely for now.

The real problem for investors — and the Australian economy — is the hidden figures.  

Martin North over at Digital Analytics puts the number of Aussie mortgages in financial distress at 1,026,106 people.

North — unlike many other corporations — considers financial distress as when net income doesn’t cover ongoing costs.

Using North’s data, that means roughly one-in-eight mortgages in Australia are in financial distress.

That means roughly one in eight million are spending more than 30% of their income on their mortgage

That is a terrifying number.

How many of those people are late with their mortgage repayments?

How many people are ‘working’ with the banks to pay some of their mortgage?

The answer is, we just don’t know.

Just because Aussie’s are tied to their mortgage debt doesn’t make the debt anymore repayable.

With banks about to internalise the data, we can’t fully assess the impact of those in arrears.

So yes, interest only loans are very different to subprime loans.

But we also can’t see the risk to banks.

And not being about to quantify the risk, is the real problem.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia