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Australia's consumer regulator's interference with mortgages could trigger economic meltdown.

BIScom Subsection: 
Nigel Morris-Cotterill

Starting point: banks in Australia have behaved appallingly. The Australian Consumer and Competition Commission, ACCC, has been shown up as .. pick a negative adjective and it's probably been used. The ACCC, along with other regulators who have been shown up as wanting are now doing their best to prove they are "across it," as Australians say. Today, they say that they have produced a "final report" from their residential mortgage price inquiry. But.. has the ACCC now moved from ensuring good behaviour to managing how banks do business? It raises risk management questions, liquidity issues and even the stability of the housing market which has been in an accelerating downturn for a while and is showing all the signs of turning into a bit of a crisis.

Let's look, first, at the ACCC's argument that obtaining information about lenders' current rates is a slow and tortuous process. First, there are only five big banks and they each have sections dedicated to those wanting to borrow for one of various purposes of which home purchase is one. On that page, each of the banks gives information which enables prospective borrowers to decide whether to approach the bank. Amongst that information is an explanation of the rates for new borrowers. It's not hidden. So the difficulty that the ACCC alleges, even if one has to visit four pages of each of the five banks means a total of 20 clicks. That is hardly arduous.

The solution to the issue, as it is identified by the ACCC, would be some form of comparison shopping site. Before suggesting that, the ACCC needs to look into its own casebook: it doesn't even have to look back far. It launched an action against Trivago, a hotel comparison website, in August this year. The allegation is that the recommendations are not impartial. Around the world, other regulators are taking action against similar websites on similar grounds. The tech to build such a website is neither complex nor expensive: there are several plug-ins for popular CMS Wordpress, for example. Given that Wordpress and many plug-ins are free, it's clear that the tech cost need not be prohibitive but those modules do not guarantee that the operator will abide by ACCC's own guidelines, issued in 2015, for what it calls "Comparator Websites."

The ACCC could, by applying a regulatory directive, require the banks to put their latest and best rates into an RSS feed which the ACCC could grab and publish.

But all of this overlooks the fact that while advertising rates is marketing, finalising the rates is a product of risk-assessment and management relating to many factors of which a significant proportion relate to the borrower(s) personally. ASIC appears to suggest that home loan lending is one-size fits all. It doesn't.

The idea that borrowers should constantly refinance their homes is dangerous. That thrusts borrowers into the hands of mortgage brokers who, history shows, are the sharks of the lending industry. One of the root causes of the global financial crisis was this: mortgage brokers encouraged over-borrowing (including so-called equity release, a scheme actively encouraged by US Fed Chairman Bernanke in one of his particularly stupid moments) on short term deals. What the ACCC might be referring to, but if it did it would imply a lack of education for the public, is the effect of low-start loans of which Australia has many. As the interest rates on those increases, then new loans will be different. But the ACCC should be careful when fomenting dissent: many low cost loans have what's called a pre-emption period which means that if a borrower makes early redemption during that period, a penalty will apply. That could easily wipe out the benefits of a change for many borrowers. That's also before the costs of redemption and remortgage are taken out.

Some might say "so what? Any costs can be added to the mortgage and paid off over time. And we could borrow a bit more to pay off our credit card debt and..." That way madness and financial crisis lies. The global financial crisis, which somehow did not have a devastating effect in Australia, was not the first crisis to be created by identical circumstances. More than a decade earlier, exactly the same cause brought down the UK economy. Alan Greenspan conveniently ignored that, presumably being more interested in the more recent and US centric dot com bubble and burst and the Asian Financial Crisis. What caused both the UK and the USA crises were very simple: over-lending in an over-heating market which led to rapidly rising house prices out of all proportion of ordinary people to pay. They were seduced by (initially) cheap interest rates backed with low-start terms and self-certified (what Aussies call low-doc) mortgages which bore little resemblance to the true ability to pay long term.