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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: ScoMo's loan scheme nationalises bank of Mum and Dad and their ASSETS

Posted by on in ROYAL COMMISSION URGENT
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ScoMo's loan scheme nationalises bank of Mum and Dad

Australian Financial Review May 13, 2019 1.00pm

Satya Marar

Satya Marar is the Director of Policy at the Australian Taxpayers’ Alliance.

 

It’s a week before the federal election and both major parties now endorse a housing deposit scheme where the government will guarantee 75 per cent of the standard 20 per cent deposit on home loans required in lieu of paying Lender’s Mortgage Insurance.

The policy helps prospective home buyers enter the market as they will only need to save 5 per cent of the value of the property since the government (read: taxpayers) has guaranteed to pay the remainder. Although noble in intent, such heavy-handed intervention could have disastrous and costly results.

Lenders generally demand a 20 per cent deposit from borrowers because it recognises the credit risk of financing a greater portion of the loan, and insulates the lender from the risk of a housing market crash or downfall in prices that could leave them out-of-pocket should a foreclosed property sell for less than what it was bought for.

The government, through its National Housing Finance and Investment Corporation, now promises that it will transfer this risk from the private sector onto taxpayers. It does this amidst an ongoing downturn in one of the world’s most highly leveraged housing markets, one which multiple analysts and economists believe is at risk of a crash. This risk is amplified by mounting popular pressure to cut the immigration intake.

By guaranteeing most of an intended "buffer" against a fall in property values, the government is essentially using public funds to guarantee that no crash will occur. What could possibly go wrong?

It’s unfortunate that neither major Australian party has learnt lessons from the United States. From the 1930s onwards, the American government enacted policies and made various guarantees intended to boost home ownership under arbitrary targets.

Like the Australian housing deposit scheme, these were often nationalised versions of existing market-driven innovations. By creating artificial incentives for those who otherwise wouldn’t secure finance or otherwise wouldn’t decide to invest in housing to do so, the US government increased investment in housing at the expense of other areas of the economy. Despite this, US home ownership rates remained virtually unchanged in the long term, moving from 63.9 per cent in 1968 to 65 per cent in 2013. In the process, American taxpayers were left on the hook for over $US4 trillion in guarantees by 2014.

By 2008, lenders entering into loan arrangements that they’d otherwise deem too risky led to disaster as borrowers began to default and housing values crashed. Though many lenders got their money back and a publicly-funded bailout to boot, hundreds of thousands of Americans lost their homes and were left with tattered credit histories.

Market distortions

The incentives created by Australia’s proposed housing deposit guarantee cause similar moral hazards. The scheme is open to singles earning up to $120,000 or couples earning up to $200,000 purchasing properties at values under certain thresholds to be set by the government in Australia’s different regional housing markets.

Though Prime Minister Scott Morrison claims that lenders will still make appropriate assessments about the borrower’s credit risk, it’s evident that an external guarantee on part of a loan creates incentives for more liberal assessments.

Property developers could respond to the scheme’s thresholds by simply raising the prices on new listings above the real market value to just within the threshold, knowing that borrowers who can now easily access finance are less likely to decline to pay the new price.

Conversely, the prices of many properties that would currently be valued modestly above the thresholds could fall to threshold levels, devaluing the assets and homes of those who currently own properties above those values. This effectively favours wealthy developers against middle-class Australians trying to sell or downsize as they could be undercut by an injection of properties within the market that are just within the scheme’s eligibility.

Also eligible for the scheme are Australians from affluent families who qualify based on their income and would otherwise borrow against equity in their family’s home or assets. To put it bluntly, the failure to adequately means-test the scheme means that our government now proposes to nationalise the "bank of mum 'n’ dad" for those fortunate enough to access it.

Unaffordable housing has been primarily caused by state government policy failures such as failing to build adequate infrastructure and failing to rezone land to boost housing supply to keep up with population growth. Instead of federal government intervention that exposes taxpayers to risk, the next government should work with the states to cut punitive taxes such as stamp duty that make it harder to save for a home. Stamp duty or land tax cuts would easily offset the cost of lender’s mortgage insurance for those seeking finance on lower deposits.

Taxpayers deserve better than a Liberal or Labor government that plays games with their money in a last-ditch attempt to buy votes that comes without independent assessment, review, or even basic modelling. It isn’t their money that they’re spending – its yours.

 

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