Economics professor slams broker remuneration structure

Mr Holden said that while it was “hard to tell” if Australia was in the midst of a housing bubble, he said that there are “some very troubling markers that suggest impudent borrowing and lending”.

Despite several regulatory reviews finding that broker remuneration is sound (and only suggesting small changes to the remuneration model), the professor took aim at the mortgage broking sector and the way brokers are remunerated.

Mr Holden wrote: “I don’t know if there’s a bubble in the Australian housing market, but there are some very troubling markers that suggest impudent borrowing and lending. Just the sort of things that preceded the US housing implosion nearly a decade ago. And I worry that bankers, borrowers and regulators seem not to have learned the lessons of that very painful piece of economic history...

“All of this is aided and abetted by mortgage brokers — or at least some of them. A remarkable 55 per cent of all new mortgages come through a broker. And those brokers get paid based on how many dollars of home loans they write.

“Their incentives are thoroughly misaligned with both borrowers and lenders — just as was the case in the US a decade ago. There are also high-powered incentives for those originating loans with banks, creating more moral hazard.”

The professor also blamed lenders and regulators for the current market.

He noted that lenders will “let you borrow a lot compared to your income”, suggesting that, using an online mortgage calculator and adjusting for tax and exchange rates, a “major Australian bank will lend about 25 per cent more for the same income level compared with what a major US bank will now lend”.

He went on to say that the structure of the mortgages are also “often very risky”.

“A staggering 35.4 per cent of home loans in Australia are interest-only, according to recent APRA figures. That has dropped from above 40 per cent, thanks to APRA’s recent 30 per cent cap on the amount of new loans that can be interest-only.

The professor continued: “Don’t forget that a key trigger of the US housing meltdown was when five-year adjustable rate mortgages could not be refinanced, and borrowers faced steep upticks every quarter in their interest rates.

“Interest-only loans in Australia typically have a five-year horizon and to date have often been refinanced. If this stops then repayments will soar, adding to mortgage stress, delinquencies and eventually foreclosures.”

Professor Holden also suggested that there had been an increase in borrowers providing “inaccurate information about their income, assets or expenses”, and he noted that there are also suggestions that more people are using unsecured personal loans for a mortgage deposit.

He concluded: “Bubble or no bubble, we seem to be blithely repeating the US housing market experience in almost every respect. People borrow too much and banks let them; there is moral hazard and fraud in mortgage issuances; regulators finally do something — very little and very late.

“The happy scenario is that macro-prudential regulation is finally biting, and that underwriting standards are starting to improve. Even if that is true, we are still left with highly indebted households who have nearly $2 of debt for every $1 of GDP, a raft on interest-only loans that will soon involve principal repayments and stagnant wage growth.

“Having lived in the US during the mortgage meltdown, I’m sorry to say that I’ve seen this movie before. The question is: why haven’t our bankers?”

While Mr Holden’s comments point the finger at many different parts of the mortgage industry, it should be noted that the financial services regulator concluded last year that no sweeping changes were necessary to broker remuneration, while the chairman of ASIC, Greg Medcraft, said last year that he believes “brokers deliver great consumer outcomes”.