Page 1815 - Week 07 - Wednesday, 22 August 2007
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The ethics of subprime mortgages are controversial, as they are aimed at consumers who normally would not be able to receive a loan due to their incapacity to make repayments and also due to their lack of deposit. The loans are attractive to investors because they have high interest rates and they have the back-up of bricks and mortar if the loan is not repaid. The ethical question becomes greyer when one considers the opportunity for people on low incomes to attain a home loan when they normally could not. And not all borrowers do default. Many are able to meet the repayments and eventually own their own home, and that is a desirable outcome. For some, it is a successful opportunity for a person without an adequate deposit to advance their financial situation and to give themselves housing security. Yet the statistics showing the dramatic rise in repossessions are compelling. One could assume that the consumers who can meet their repayments would be able to demonstrate at the outset, when signing up for a loan, their capacity to meet the repayments.
The CARE report uses statistics compiled from ACT Supreme Court data. Between 2002 and 2005, there was a dramatic increase in the number of lenders seeking actions for property repossession, and obtaining repossession. The length of time between when the lender first brings an action to court and when the lender repossesses the property has also increased, suggesting that lenders are becoming less likely to respond positively to requests by borrowers to defer eviction proceedings.
Concern about practices of the subprime mortgage markets arises because the percentage of subprime lenders seeking property repossession was more than double that of the banks and credit unions combined. As I said before, 68 per cent of those lenders seeking repossession were non-bank lenders. The rise in interest rates over recent years, and especially recent weeks, has had an adverse impact on this problem. As borrowers in this field are high risk, the interest rates they must pay are often higher than those charged to borrowers from banks and credit unions, so any increase in RBA-set interest rates, say from five to six per cent, would see subprime borrowers face an increase in rates that are already much higher.
While it is true that current interest rates are much lower than were experienced in the early 1990s, the consumer ratio of debt has dramatically increased. The Australian newspaper has reported that average household debt in Australia has risen from 40 per cent of household disposable income in the late 1980s to 160 per cent now. So for every $1 that a household earns, on average it now owes $1.60 rather than 40c.
I must make mention of the recent collapse of the US subprime mortgage market. As a result of this event, some local borrowers will face an increase in their interest rates that is in addition to the recent rise announced by the Reserve Bank. Non-bank lender Bluestone, for example, which specialises in low documentation loans, has already said it will have to lift its borrowing rates in addition to last week’s official RBA increase because of the US subprime collapse. About one-quarter of its customers already have credit problems. Depending on a customer’s credit history, Bluestone now offers rates ranging from 7.8 per cent to 12 per cent, compared with the standard variable rate of 8.3 per cent.
On Monday, the media reported that Treasurer Costello was calling on state and territory governments to crack down on no doc and low doc mortgages. Some
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