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Credit conditions ‘the tightest they’ve been in 15 years’

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Reporter 7 minute read

Members of the industry have challenged the assertions of a professor of economics regarding the state of the current lending market and broker remuneration, with one broker stating that it’s harder than ever to get a loan.

In an opinion piece for The Australian Financial Review, a professor of economics at UNSW Business School, Richard Holden, warned that Australia is “blithely repeating” the US housing market “mistakes” that led the housing “implosion” and global financial crisis.

According to Mr Holden, there are several “markers” that point to this, including lenders that “let you borrow a lot compared to your income”, “risky” mortgage structures and, most notably, mortgage broker commissions and incentives.

The professor wrote: “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 claims have been dismissed by the executive director of the Finance Brokers Association of Australia (FBAA), Peter White, who told The Adviser that he believed Mr Holden’s analysis “shows absolute ignorance, to the nth degree, of what actually happened in the US. It had nothing to do with brokers. Brokers are a distribution channel. What caused the US GFC was that the wholesale corporate bond market was getting greedy on low-doc lending and then had bonds that they wouldn’t sell. It had nothing to do with brokers whatsoever.”

Mr White added that broker remuneration and incentives had been the subject of several reviews in recent years, and that the professor’s comments, therefore, “don’t make any sense whatsoever in the context of the current market”. 

Touching on Mr Holden’s comments about there being a “moral hazard”, the FBAA head said: “Australia is globally known as being one of the most regulated countries in the world and it ensures that any potential risk is mitigated and looked at to ensure that there is no moral question.

“Bonus incentives have been looked at to try and remove any risks, and that is what we’ve done. These are things that were done in the past, it’s not current. So, he is not up to speed with what is happening in the current reality of the current market.


“Drawing these analogies to the US market and pointing some line to brokers and their payment and incentives is just garbage.”

Several brokers also contacted The Adviser to voice their opposition.

Credit conditions ‘the tightest they’ve been in 15 years’

Speaking to The Adviser, Smartline mortgage broker Ian Simpson said that he “deeply disagreed” with a number of Mr Holden’s assertions.

Mr Simpson said that the comparison to the US subprime market was “wrong” because low-doc lending pre-subprime in the US constituted more than half of lending and did not require verification of income, whereas Australia has less than 5 per cent low-doc loans, and it largely used alternative income verification.

He continued: “I completely refute both of the broker allegations. There has been an exhaustive review and analysis of the whole broker remuneration model etc and what they have discovered is that brokers actually have very little influence on the amount a borrower can borrow. In 99 per cent of cases, we look at a customer’s scenario, a borrower’s situation and assess income, how much deposit they have, fixed liabilities etc and work out, based on their current situation, how much they could borrow. But the amount that the client borrows is not dictated by us; it’s dictated by their situation.

“Within the broker community, I’d say that 90 per cent of brokers have a long-term concern of their clients (in every industry around 10 per cent do), because if you don’t have a concern for the long-term health and welfare of the client, you don’t actually have a business. And given all the levels of compliance and continued education and scrutiny, you’re not thinking about getting a few extra dollars in commission now at the detriment of your client. Your client needs always come first, and their best interests come first, because our business are only built on happy clients and long-term relationships.”

The Smartline broker added that the lending market, rather than being loose, was actually tighter now than he had seen it for more than a decade.

“Australian lending standards are probably the tightest lending standards that I have seen in my 15 years of being a broker,” Mr Simpson said. 

“I’ve never seen such a gargantuan gap between interest rates and servicing rates, but that is not necessarily a bad thing. Borrowing money is hard. Banks are asking more questions than they ever used to ask — it’s a daily challenge getting loans approved.

“Credit conditions are tight, the tightest I have seen them ever. And now with the Royal commission, banks are going to be asking more and more questions, not less and less.

“So, from a remuneration point of view, we’re working as hard as we ever had for our money. And from a systemic point of view, the market is healthy, and if the regulators weren’t, there then the housing market would be putting the financial system at risk.

“Just because the US housing market went up and then had an almighty housing crash does not mean that we are going to have one here in Australia. I don’t believe that at all, considering the house price growth in the last 12 months has risen [by] 3 per cent. That’s hardly a market out of control.”

[Related: Economics professor slams broker remuneration structure]

Credit conditions ‘the tightest they’ve been in 15 years’
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