Property Council PM’s dirty and dangerous FHB brain fart

MacroBusiness 12:30 pm on May 14, 2019

David Llewellyn-Smith


Scummo revealed at Domain:

A $500 million plan to help first-home buyers into the market did not go through cabinet and has not been modelled for its impact on property prices, as experts warn the policy will struggle to meet its objectives.

The first some members of cabinet heard about the plan, which will see the government effectively guarantee a portion of loans taken out by first time buyers, was when Prime Minister Scott Morrison announced it during the Coalition’s election campaign launch on Sunday.

More at Banking Day:

Banking Day was told by several industry sources on Monday that the policy was slapped together by the coalition in the last week after the Housing Industry Association floated the idea to the caretaker government.

The policy, which has triggered a stream of concerns over responsible lending and the residual liability that taxpayers might wear for defaulting borrowers, took most consumer and industry groups by surprise.

The coalition appears to have consulted with no industry groups about the policy apart from the HIA – the peak body representing the construction and development sector.

So, the PM, a former researcher at the Property Council, hands out a great boondoggle at the 11th hour to his mates. This is corruption.

Moving into the policy itself, it works at cross-purposes, via Banking Day:

Putting to one side the merits of supporting small lenders, the scheme as it has been explained so far by the coalition seems to have been conceived with a cross-purpose: to support young homebuyers get a loan and also to bolster loan activity for second tier lenders.

The two objectives are not entirely compatible.

Not all small lenders offer competitive home loan rates and many sell mortgages that are more expensive than offers from ABA-member banks who were not consulted about the homebuyer support scheme.

There is a risk with a policy that preferences some lenders over others that borrowers could be enticed – in this case by the government – into mortgage products that might not be among the best deals available in the market.

The Coalition government and the Labor opposition need to explain why the scheme is going to be operate on a preferred lender model, rather than one that is borrower-directed.

But wait, there’s more, at the AFR:

While bankers said they were awaiting further detail, they said loans under the scheme could attract significantly higher capital charges compared to loans in which customers put down a larger deposit or took up lenders mortgage insurance.

If so-called mortgage risks weights were increased from 25 to 50 per cent on a $475,000 loan, a bank would need to charge up to 1 per cent more on a home loan in order to maintain the same return on equity.

Bankers however said different risk weight rules applied to loans with mortgage insurance for major banks as compared to regional lenders.

And more:

John Trowbridge, an insurance industry veteran who was a senior member of the Australian Prudential Regulation Authority, said the intervention would partly unwind the Howard government’s $108 million privatisation of the Housing Loans Insurance Corporation.

“This sounds like a government-run lender’s mortgage insurance vehicle, so that’s a surprise,” Mr Trowbridge said.

If the scheme does render the LMI business defunct, how are the existing LMI businesses, that guarantee some half a trillion in risky mortgages, going to grow their revenue bases to protect their equity? As such, their capital and even viability becomes an open question, threatening further higher costs to existing insured FHBs. Or are we just going to nationalise?

This is what happens when a desperate housing flunky somehow stumbles into a prime ministership.