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BFCSA investigates fraud involving lenders, spruikers and financial planners worldwide.  Full Doc, Low Doc, No Doc loans, Lines of Credit and Buffer loans appear to be normal profit making financial products, however, these loans are set to implode within seven years.  For the past two decades, Ms Brailey, President of BFCSA (Inc), has been a tireless campaigner, championing the cause of older and low income people around the Globe who have fallen victim to banking and finance scams.  She has found that people of all ages are being targeted by Bankers offering faulty lending products. BFCSA warn that anyone who has signed up for one of these financial products, is in grave danger of losing their home.

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BFCSA: Property powder keg threatens Australian Major Banks

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Property powder keg threatens banks

The Australian 11:46am July 11, 2018

Robert Gottliebsen

 

Bank shares have been rising again as the market believes that their directors are right on the issues of problem loans and that global investment house UBS is wrong in stating that deep issues loom.

No one really knows — certainly not me — whether the banks or UBS are right but the issue is now taking on greater significance because liability insurers are becoming reluctant to insure banks and particularly their directors over claims that might arise.

In addition, if UBS are right about the level of problem bank loans, it looks like many of those loans could have been extended as a result of irresponsible lending and therefore the banks will be liable for big losses.

While this high stakes debate continues, across my desk came a detailed survey undertaken by the Digital Finance Analytics Group (DFA) which comes out on the side of UBS, although UBS are never mentioned in their work.

Digital Finance combines data from 52,000 household surveys, data from the Reserve Bank, the ABS and APRA plus private data from lenders and aggregators. It was updated last month.

The group analyses cash flow based on real incomes, outgoings and mortgage repayments. Of course, most banks simply don’t have that data about their individual clients, which is a clear weakness in their systems.

The analysis of the data is forecasting that the banks face losses on housing loans of about $3.5 billion over the next 12 months. Now this is not a disaster because existing provisions are around $2.5bn annually and the markets will anticipate small rises in loan losses given the very low level that they reached.

The problem that Digital Finance is isolating is that there is a powder keg of households that are having great difficulty keeping up with their loan repayments and if dwelling prices were to continue to fall, then loss rates from those loans will accelerate dramatically.

We are all familiar with the problems that arise in low income families who pay big prices for dwellings in outer suburban areas. They certainly show up in the survey but they are not the main cause of the looming problem.

Instead, the biggest single losses are likely to come from the so-called “exclusive professionals”. These are the high income professionals whom banks proudly display as their best customers but the banks allowed them to take on too much debt.

The number of loan-stressed families among this “exclusive professionals” group is estimated to be 45,000, much lower than many other population segments but the total estimated losses in this area is likely to exceed $985 million in the year ahead.

According to DFA principal Martin North, the reason that many affluent people are struggling is that when they noticed that they had racked up substantial paper gains on their residential dwelling, they invested more deeply in the market, negatively gearing multiple houses often on interest-only loans and, of course, they bought a holiday home.

Add that to rising family costs including energy, childcare and school fees. Unless they are highly paid public servants the likelihood is that their salaries are not rising and sometimes the job of one of them is under threat (for example if they are a bank executive).

North believes too many in this group were sucked in by generous credit and became over extended. Their residential houses are usually in the $2m to $5m valuation range which is the price segment most vulnerable to price falls. That section of the housing market is also being affected by the number of Baby Boomers who want to downsize.

Another surprising category was “mature stable families” where 111,000 families are under stress — more than twice in the “exclusive professionals” group, although the level of their problems is not as severe.

Yet they are the last group that you expect to be high on the list. North says they too have undertaken negative gearing and their incomes are falling but, more seriously, in many cases they have mortgaged themselves to enable their children to buy a home and their incomes are not matching the costs of the borrowings.

As you would expect, there are also a lot of suburban mainstream and young growing families that are identified in the survey as being under mortgage stress because they have taken on huge mortgages and their incomes are not rising to match.

But an interesting group is the “young affluent” who although not large in number (17,451 are under mortgage stress) and they are likely to cost the banks over $355m in losses over the next 12 months. What simply happened was that they purchased one or two bedroom apartments in Melbourne and Sydney and which have experienced a 20 per cent plus fall in value.

Suddenly they are struggling, particularly as the small accommodation no longer suits their needs. So, overall what we are looking at is a soft underbelly of around 970,000 households that are under mortgage stress with New South Wales and Victoria the two main states (around 260,000 in each) and Queensland not far behind with 172,000.

If house prices are maintained at roughly present levels then the problem is manageable because property can be sold and there are limited losses but were dwelling price falls to follow the downward path of inner city apartments, then these stressed cash positions will become a much bigger problem for the banks.

And as we all know banks, under pressure from APRA and I believe the banking royal commission, are increasing the criteria on which they lend.

If that creates a credit squeeze that causes house prices to fall further, then we will face a very difficult situation in our banking system.

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