Mortgage Crisis 2.0: BofA CEO Wants To Slash Down Payments To Help Poor Millennials

From Zero Hedge.

Among a host of other issues, one the critical things that contributed to the housing crisis of 2008 was the fact that speculative borrowers had nearly no “skin in the game.”  Anyone who decided they wanted a piece of the rapidly inflating housing bubble could go out and buy multiple houses with no money down or, in some cases, even do “cash out” purchases whereby banks would finance more than 100% of the purchase price leaving ‘buyers’ to pocket the excess.

Shockingly, such terrible underwriting standards was a really bad idea.  Turns out that offering investors infinite returns on capital, given that they could purchase millions of dollar worth of assets without ponying up a single penny, causes wild speculation resulting in devastating asset bubbles.

But, in the wake of one of the worst asset bubbles in history, new legislation came along requiring traditional mortgage borrowers to put 20% down when purchasing a new home.

Ironically, the new owner of one of the worst mortgage lenders of the 2008 era, is now arguing that down payment requirements should be slashed in half.  Speaking to CNBC, Bank of America CEO Brian Moynihan, the proud owner of Countrywide Financial, said that his mission is to reduce mortgage down payment requirements to 10% for traditional loans.  Per CNBC:

 “But, you know, I think at the end of the day is people forget that, at different points in your life and different points on what you’re doing in life requires you to think about housing differently as a place for you and your friends, as a place for you and maybe your significant other, and then ultimately, a place for family. That drives change. And so yes, it’s taken more time. And we talked a lot about this, you know, four or five years ago, that if you require a 20% down payment, it takes just a little more time to accumulate 20% than it would 3% or none, which is what the rules were for a short period of time.”

“So our goal, going back to regulatory reform, is should you move the down payment requirement from 20% to 10%? Wouldn’t introduce that much risk.”

“But would actually help a lot of mortgage to get done. And if you look at the statistics, the difference between 80 and 90 LTV –loan-to-value – isn’t much different as it is between 95 and 90. That’s when you start to see real differences in performance statistics. And so we don’t want to wish people into borrowing money that then they have trouble repaying.”

Of course, we’re certain that Moynihan’s sole purpose for wanting to lower down payments is to help those poor millennials living in mom’s basement and has nothing to do with the fact that’s he’s lost a ton of fee revenue to government-backed loans that only require a 3% down payment.FHA

But, why not?  Gradually destroying lending standards worked out really well last time around.

The Property Imperative Weekly – May 20th 2017

The latest edition of our weekly roundup of property, finance and economics review is available. We discuss the latest economic news, recent developments in the bank tax debate and the latest mortgage pricing and volume data.

Watch the video or read the transcript.

This week, the latest updates from the ABS showed that the trend unemployment rate stuck at 5.8%, thanks to a large rise in part-time employment. In fact, employment was up by a very strong 37,400 in April after increasing by a massive 60,000 in March but the total hours worked was reported to have fallen by 0.3% in April and was down by 0.1% over the past two months. This may be because of changes in the ABS sampling. Many commentators suggest the true position in worse, but we do know that unemployment was above 7% in South Australia, and the number of older people seeking work also rose.

The latest wages data, showed that the seasonally adjusted Wage Price Index rose 0.5 per cent in the March quarter 2017 and 1.9 per cent over the year, according to ABS figures. This makes a bit of a joke  of the strong wages growth rates predicated in the recent budget.

The seasonally adjusted, Wage Price Index has recorded quarterly wages growth in the range of 0.4 to 0.6 per cent for the last 12 quarters. However, private sector wages rose 1.8 per cent whilst public sector wages grew 2.4 per cent, so public servants are doing better than the rest of the population.

The pincer movement of higher inflation and lower wage growth now means that average wages are falling in real terms, especially for employees in the private sector.  Not good for those with mortgages as rates rise flow though. This aligns with our Mortgage Stress data.

There was further heated debate about the Bank levy, with the Treasurer saying on ABC Insiders that the impost was a permanent measure and linked to the strong profits and competitive advantage the big four have thanks to the “too-big-to-fail” implicit guarantee from the government. He again said the costs of the tax should not be passed on to customers.

On the other hand, the banks put their own slant on the issue, saying that the costs would be passed on, and the levy was bad policy. Ex Treasury Boss Ken Henry, now the Chairman of NAB, suggested there should be an inquiry into the proposed tax and said it looked like something from the eighties, before all the free market reform.

The banks made submissions to the Treasury complaining about the short timeframes, and seeking a delay in implementation.  ANZ suggested a delay till September 2017 to allow sufficient time for design of the legislation and also recommended the tax should be applied to the domestic liabilities of all banks operating in Australia with global liabilities above $100 billion. They concluded “There is no ‘magic pudding’. The cost of any new tax is ultimately borne by shareholders, borrowers, depositors, and employees”.

But the real debate should be framed by the excess profits the big banks make, and the unequal position the big four have thanks to the implicit government guarantee, meaning they can out compete regional and smaller lenders. In fact, the value of this subsidy is significantly higher than the 6 basis points being imposed. These are the very high stakes in play, and the outcome will significantly impact the future shape of banking in Australia.  In fact, you could argue the big four receive the largest subsidies of any industry in the country – way more than, for example, the entire car industry.

In addition, the Australian Bankers Association is caught trying to represent the interest of the big four, and other regional players, including some who have supported the tax on the basis of it helping to level the competitive landscape. The ABA issued a statement to say there was no division, but there clearly is. Not pretty. Some have suggested the smaller players should create their own separate lobby group.

The latest lending data from the ABS showed that the mix of lending is still too biased towards unproductive home lending, at the expense of lending for commercial purposes. Overall trend finance flow in trend terms rose 1.3% to $70 billion, up $691 million. The total value of owner occupied housing commitments excluding alterations and additions rose 0.1% in trend terms, to $20.1 billion, up $26 million. Within the fixed commercial lending category, lending for investment housing fell 0.3%, down $44 million to $13.2 billion, whilst lending for other commercial purposes fell 2%, down $416 million to $20.3 billion. 39% of fixed commercial lending was for investment housing and this continues to climb.  Most of the investment in housing was in Sydney and Melbourne.

The more detailed housing finance data showed that the number of owner occupied first time buyers rose in March by 20.5% to 7,946 in original terms, a rise of 1,350.  In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 13.6% in March 2017 from 13.3% in February 2017.

The DFA surveys saw a small rise in first time buyers going to the investment sector for their first property purchase. Total first time buyers were up 12.3% to 12,756, still well below their peak from 2011 when they comprised more than 30% of all transactions. Many are being priced out or cannot get finance.

Lenders continued to tighten their underwriting standards for interest only loans, with CBA, for example, ending discounts, fee rebates and dropping the LVR to 80%, having in recent months imposed no less than three rate rises on the sector. ANZ tightened their lending parameters too, with the maximum interest only period reduced from 10 years to five years, tightening LVRs and imposing other restrictions.

Overall we think the supply of investor loans will reduce, and that smaller lenders and non-banks will not be able to meet the gap, so we are expecting loan growth to slow further, and the price of loans to rise again.

We also saw auction clearances stronger last weekend, so this confirms our survey results, that households still have an appetite for property, despite tighter lending conditions. Recent stock market falls and greater market volatility will play into the mix now, so we think there will be a tussle between demand for property, especially for investment purposes and supply of finance.

Brokers may well get caught in the cross-fire, and the recent UBS report suggesting that brokers are over-paid for what they do, will not help.  Others have argued UBS got their sums wrong, and denounced the report as “ridiculous”.

It is still too soon to know whether home price growth is really likely to turn, but the strong demand still evident in Sydney and Melbourne suggests momentum will continue for as long as credit is available at a reasonable price. So I would not write off the market yet!

And that’s it from the Property Imperative Weekly this time. Check back for next week’s summary.

The human face of Australia’s housing crisis

From The New Daily.

Chris Radford and Michelle Apostolopoulos are high school sweethearts. They met and fell in love at Northcote public school, which sits on the same main road that runs near both their parents’ fully paid off houses.

They both rent in Melbourne and are fast approaching the age their parents married, bought houses and started families. Repeating that feat in today’s market seems impossible.

Chris, 24, has spent the last six years of his life stacking shelves in a trendy inner-city supermarket, so he knows the price of avocados – that symbol of millennial decadence that is supposedly holding him back from property ownership.

“Four bucks, five bucks each. Yeah, I know how much they cost,” he says. “I don’t eat a lot of avocado to begin with.”

The couple, who plan to marry soon, are exactly who Treasurer Scott Morrison’s latest federal budget was supposed to help: hard-working, hard-saving Australians who want nothing more than a modest home to call their own.

Unlike their parents’ generation, the ‘Australian Dream’ seems to be getting further out of reach, what with rising prices, penalty rate cuts and record-low wage growth.

Chris pays $110 a week for a room in a house he shares with two friends in the Melbourne suburb of Moonee Ponds. When it rains, water drips through the ceiling into a strategically placed pot.

The house will soon be knocked down for apartments, so the landlord has given up on the place.

When his parents bought their house in Thornbury for $80,000 back in 1991 it was not much of a stretch for two people in their mid-20s. It is now worth at least $1 million, probably more.

Because of this enormous increase in value, buying even a more modest house today requires vastly more effort. Chris and Michelle, 23, estimate that a median-priced Melbourne home will require them to save a 20 per cent deposit of $150,000.

Even if they were to save every dollar they earn, it would still take them years to build that much – and that’s without taking price growth into account.

“It’s so unfair, two people should be able to save enough in a few years for a house!” Michelle says.

“Even if we saved hard I know we wouldn’t be able to afford within 32 kilometres of here.”

Part of the reason that saving is so hard for the couple is the new round of attacks on their pay.

Chris has worked his supermarket job all through high school and now into university. He works Sundays and has for years. He also works unpaid at an internship as part of his university degree, which requires him to work full-time on top of his part-time work.

This leaves him relying heavily on weekend penalty rates — which he’ll lose come July 1 because of a recent decision by the Fair Work Commission.

“If I didn’t have to work on Sunday, I wouldn’t,” he says.

Michelle, too, regularly works weekends. But because she works for one of Australia’s two main supermarkets, she’ll be lucky enough to keep her penalty rates.

“People who work weekends miss out on seeing family and friends,” she says.

“You deserve [penalty rates], you’ve busted your arse all weekend.”

They’re both disappointed the government didn’t do more in the budget to make things easier for low-paid workers and aspiring property buyers like themselves. Treasurer Morrison’s plan to allow first home buyers to tip up to $30,000 into their superannuation doesn’t excite them.

“When you really look at the details it starts looking practically impossible,” Michelle says.

“The government isn’t doing anything to make it easier to buy a house.”

To make matters even worse, with the university debt repayment threshold dropping, Chris and Michelle will both have to pay back more to the government each year.

“A lot of people think you’re not working hard enough if you can’t save a deposit. They just pick on young people because we can’t do anything about it,” she says.

“What are you supposed to do? Store everything in a cardboard box, then live in the cardboard box too?”

US Real hourly earnings up 0.4 percent over the year ending April 2017

The US Bureau of Statistics says real average hourly earnings increased 0.4 percent, seasonally adjusted, for all private sector employees from April 2016 to April 2017. The increase in real average hourly earnings combined with no change in the average workweek resulted in a 0.3-percent increase in real average weekly earnings over the year.

Real average hourly earnings for production and nonsupervisory employees increased 0.1 percent, seasonally adjusted, from April 2016 to April 2017. The increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek for these workers resulted in an over-the-year increase in real average weekly earnings of 0.5 percent.

These data are from the Current Employment Statistics program. Earnings data for the most recent 2 months are preliminary.

ABA says the Federal Government must open up the major bank levy for public scrutiny

The Federal Government must open up the major bank levy for public scrutiny, the Australian Bankers’ Association said today.

“The four major banks have met Treasury’s extraordinarily tight timeframe to lodge their submissions this morning under strict confidentiality,” ABA Chief Executive Anna Bligh said.

“It is now time for the Government to reveal when it will release the legislation to the public – after all, this tax will affect millions of Australians who own shares in banks or are bank customers.

“At the moment we can’t quantify the impact of this tax on banks, and the flow on effects to customers, because the legislation has not been in the public domain.

“The ABA calls on the Government to provide more clarity as to when the public will be able to see the major bank levy legislation,” she said.

Macquarie Bank to address inadequacies within their wholesale FX businesses

ASIC has today accepted an enforceable undertaking (EU) from Macquarie Bank Limited in relation to the bank’s wholesale foreign exchange (FX) businesses, following an ASIC investigation.

ASIC is concerned that the bank failed to ensure that its systems and controls were adequate to address risks relating to instances of inappropriate conduct identified by ASIC.

ASIC Commissioner Cathie Armour said, ‘The wholesale spot foreign exchange market is one the world’s largest financial markets and the proper functioning of this market is of vital importance to the Australian economy.’

‘ASIC has now accepted undertakings from some of Australia’s largest market participants to put in place forward looking processes and controls to ensure that their foreign exchange businesses provide financial services honestly, efficiently and fairly.’

‘ASIC will continue to ensure that there can be ongoing confidence in how our financial institutions conduct themselves now and into the future,’ Ms Armour said.

ASIC identified the following conduct by employees of Macquarie in its spot FX business between 1 January 2008 and 30 June 2013:

  • On a number of occasions, Macquarie employees disclosed to external third parties confidential details of pending client orders including identification of a client;
  • On a number of occasions, Macquarie employees inappropriately disclosed to external third parties confidential and potentially material information about Macquarie’s trading activity associated with large pending AUD orders; and
  • On a number of occasions, when the market approached the trigger price of a stop loss order, Macquarie spot FX traders responsible for managing the order traded in a manner that may have been intended to cause the trigger price to trade when it might not have traded at that time.

ASIC is concerned that Macquarie did not ensure that its systems, controls and framework for supervision and monitoring were adequate to prevent, detect and respond to such conduct, which had the potential to undermine confidence in the proper functioning and integrity of the market.

Macquarie will develop a program of changes to its existing systems, controls, training, guidance and framework for monitoring and supervision of employees in its spot FX and non-deliverable forwards businesses to prevent, detect and respond to:

  1. inappropriate disclosure of confidential information to external market participants; and
  2. inappropriate order management and trading in respect of stop loss orders.

ASIC will appoint an independent consultant to assess the program and its implementation. The program will incorporate changes already made by Macquarie as part of ongoing reviews of its businesses.

Upon implementation of that program, for a period of three years, Macquarie will conduct an annual internal review of the program, which will be independently assessed, and provide an annual attestation from its senior executives to ASIC.

Macquarie will also make a community benefit payment of $2 million to The Smith Family to support The Smith Family’s financial services program aimed at improving young people’s understanding of money management.

ASIC encourages market participants to adhere to high standards of market practice, including those set out in the Global Code of Conduct for the Foreign Exchange Market, published by the Bank of International Settlements (BIS Global FX Code). The BIS Global FX Code provides a global set of practice guidelines to promote the integrity and effective functioning of the wholesale FX market. Phase 1 of the Code was published in May 2016, and Phase 2 is due for publication in May 2017.

ASIC is grateful for the assistance of international regulatory counterparts in progressing the investigation.

Background

Prior to accepting these EU from Macquarie, ASIC’s FX investigation has seen ASIC accept enforceable undertakings from each of the Westpac Banking Corporation, Australia and New Zealand Banking Group Limited, National Australia Bank Limited and the Commonwealth Bank of Australia (refer: 17-065MR and 16-455MR). The institutions also made voluntary contributions totalling $11 million to fund independent financial literacy projects in Australia.

The wholesale spot FX market is an important financial market for Australia. It facilitates the exchange of one currency for another and thus allows market participants to buy and sell foreign currencies. As part of its spot FX business, Macquarie entered into different types of spot FX agreements with its clients, including Australian clients.

Spot FX refers to FX contracts involving the exchange of two currencies at a price (exchange rate) agreed on a date (the trade date), and which are usually settled two business days from the trade date.

Non-deliverable forwards refer to FX forward contracts which, at maturity, are settled by calculating the difference between the agreed forward rate and a settlement rate (which is usually determined by reference to a benchmark published exchange rate). A FX forward contract is an agreement between two counterparties to exchange currencies at a future date at a rate agreed upon in advance.

New $270 levy for WA investors

From The Real Estate Conversation.

The Real Estate Institute of Western Australia has called the government’s expected introduction of a $270 levy for property investors “short sighted” and “irresponsible”.

Details of the levy have not yet been formalised by the Government, but the REIWA understands the levy will be linked to water rates and will apply to properties with a gross rental value of $24,000 or more.

The levy is being considered as a means to raise cash for the troubled state budget.

REIWA Councillor Suzanne Brown said it was extremely disappointing the industry was not consulted about the speculated policy change, and said a levy will make property investment less attractive in Western Australia.

“The private rental market is crucial to the provision of rental accommodation in Western Australia,” she said. “This levy will only increase the cost of owning a rental property, and make it a less viable investment option.”

Brown said the property investment market in the state is already struggling in a weak economy.

“With vacancy rates sitting at an all-time high of 6.5 per cent, Western Australian investors are already doing it tough,” she said.

“Slapping them with an additional cost in an already soft market is a knee-jerk reaction that will do more harm than good,” said Brown.

“The government should be cautious of targeting property investors,” said Brown, as landlords may pass on the levy to tenants in the form of higher rents.

“Not only will it affect owners, but this has the potential to hit tenants if the cost of the levy is passed on,” she said.

“Housing affordability is already a significant concern in Western Australia. Applying additional costs to the property market is not the answer and will only exacerbate the issue,” Brown concluded.

$200m+ Refunds Due From Major Financial Advisory Firms – ASIC

ASIC says AMP, ANZ, CBA, NAB and Westpac have so far repaid more than $60 million of an expected $200 million-plus total in refunds and interest for failing to provide general or personal financial advice to customers while charging them ongoing advice fees.

These institutions’ total compensation estimates for these advice delivery failures now stand at more than $204 million, plus interest. As foreshadowed in ASIC’s Report 499 Financial advice: fees for no service (REP499), ASIC can now provide an update on compensation outcomes to date.

Background

In October 2016 the Australian Securities and Investments Commission (ASIC) released REP499. The report covered advice divisions of the big four banks and AMP and described systemic failures to ensure that ongoing advice services were provided to customers who paid fees to receive these services, and the failure of advisers to provide such services. The report also discussed the systemic failure of product issuers to stop charging ongoing advice fees to customers who did not have a financial adviser.

At the time of the publication of the report compensation arising from the fee-for-service failures reported to ASIC was approximately $23.7 million, which had been paid, or agreed to be paid, to more than 27,000 customers.

Since REP 499 a further $37 million has been paid or offered to more than 18,000 customers. In addition, the institutions’ estimates of total required compensation for general and personal advice failures have increased by approximately 15% to more than $204 million, plus interest.

The table provides, at an institution level, compensation payments and estimates that were reported to ASIC as at 21 April 2017. Since that date compensation figures have continued to increase.

Group Compensation paid or offered Estimated future compensation   (excludes interest) Total (estimate, excludes   interest)
AMP $3,816,327 $603,387 $4,419,714
ANZ $43,818,571 $8,613,001 $52,431,572
CBA $5,850,827 $99,786,760 $105,637,587
NAB $4,641,539 $385,844 $5,027,383
Westpac $2,670,479 Not yet available $2,670,479
Total (personal advice   failures) $60,797,743 $109,388,992 $170,186,735
NULIS   Nominees (Australia) Ltd (1) Nil $34,720,614 $34,720,614
Total (personal and general   advice failures) $60,797,743 $144,109,606 $204,907,349

Source: Data is based on estimates provided to ASIC by the institutions and will change as the reviews to determine customer impact continue.

(1) For details, see the section on NAB below.

Key compensation developments

AMP

  • AMP’s total compensation estimate decreased from $4.6 million to $4.4 million as AMP reviewed customer files and data to determine compensation required, and revised its previous estimates.

ANZ

  • The total compensation estimate has increased from $49.7 million to $52.4 million due to the expansion of existing compensation programs and the identification of further failures by authorised representatives of two ANZ-owned advice businesses:
    • Financial Services Partners Pty Ltd; and
    • RI Advice Group Pty Ltd.
  • The largest component of ANZ’s compensation program relates to fees customers were charged for the Prime Access service, where ANZ could not find evidence of a statement of advice or record of advice for each annual review period.
  • In addition, ANZ found that further compensation of approximately $7.5 million is required to be paid to ANZ Prime Access customers for ANZ’s failure to rebate commissions in line with its agreement with customers. This compensation has not been included in the figures in this media release because it does not relate to a failure to provide advice for which customers were charged, but is noted for completeness and transparency.

CBA

  • There has been no substantial change in CBA’s compensation estimate, which remains at approximately $105 million, plus interest, the majority of which relates to Commonwealth Financial Planning Ltd (CFPL). The compensation estimate for CFPL results from a customer-focused methodology whereby, as well as providing refunds where the adviser failed to contact the client to provide an annual review, CFPL will provide fee refunds to customers where:
    • the adviser offered the customer an annual review and the customer declined, or
    • the adviser tried to contact the customer to offer a review, but was unable to contact the customer.
  • Some of the other licensees or banks covered by the ASIC fees-for-no-service project have not, at this stage, adopted a similar customer-focused approach to the situation in which a service was offered but not delivered.  ASIC continues to discuss the approach to this situation with these banks and licensees.

NAB

  • Since the publication of REP 499, by 21 April 2017, NAB reported to ASIC the further erroneous deduction of adviser service fees for personal advice from more than 3,000 customers of the following licensees:
    • Apogee Financial Planning Ltd: $11,978, from 11 customers;
    • GWM Adviser Services Ltd: $179,446, from 290 customers;
    • MLC Investments Ltd: $9,755, from six customers;
    • National Australia Bank Ltd: $2,777, from seven customers; and
    • NULIS: $173,120, from 3,310 customers.
  • In addition, the table shows the expected compensation of approximately $34.7 million by NAB’s superannuation trustee, NULIS Nominees (Australia) Limited (NULIS), for two breaches involving failures in relation to the provision of general advice services to superannuation members who paid general advice fees (other fees referred to in this release relate to personal advice). As announced by ASIC on 2 February 2017 ASIC has imposed additional licence conditions on NULIS following these and another breach: ASIC MR 17-022. The failure was by MLC Nominees Pty Ltd (and MLC Limited for the first of the two breaches).  Whilst on 1 July 2016 the superannuation assets governed by MLC Nominees were transferred by successor fund transfer to NULIS, and on 3 October 2016 NAB divested 80% of its shareholding in the MLC Limited Life Insurance business, accountability for this remediation activity (including compensation) remains within the NAB Group. The estimate of customer accounts affected has increased from approximately 108,867 to 220,460 since REP 499, reflecting the second of two breaches.

Westpac

  • REP 499 noted that Westpac had identified a systemic fees-for-no-service issue in relation to one adviser only, with compensation of $1.2 million paid in relation to those failures.
  • Following further ASIC enquiries, Westpac subsequently clarified that it has paid further compensation of approximately $1.4 million to 161 customers of that adviser and 14 further advisers, in respect for fee-for-no-service failures in the period 1 July 2008 to 31 December 2015.

Next steps

ASIC will continue to monitor these compensation programs and will provide another public update by the end of 2017.  In addition ASIC will continue to supervise the institutions’ further reviews to determine whether any additional instances are identified of fees being charged without advice being provided.

MoneySmart

Customers who are paying ongoing advice fees for services they do not need can ask for those fees to be switched off. Customers who have paid fees for services they did not receive may be entitled to refunds and compensation, and should lodge a complaint through the bank or licensee’s internal dispute resolution system or the Financial Ombudsman Service.

ASIC’s MoneySmart website has a financial advice toolkit to help customers navigate the financial advice process and understand what they should expect from an adviser. It also has useful information about how to make a complaint.

The Big Four Banks Are By Far the Most Publicly Subsidised Companies in the Country

More From Christopher Joye in the AFR.

According to RBA research in 2015, the “major banks have received an unexplained funding advantage over smaller Australian banks of around 20 to 40 basis points on average since 2000”.

While advisers say Morrison does not want to state on the record that the new levy is a tax on the implicit government guarantee of the big banks’ wholesale debts for fear of fuelling moral hazard, he cited exactly the same 20 to 40 basis point subsidy on Insiders on Sunday to rationalise it.

This accords with our estimates that the artificial increase in the majors’ senior bond ratings by two notches from A to AA- on the assumption they will always be bailed out lowers their current cost of capital by 17 basis points annually. (Macquarie’s rating gets upgraded from BBB+ to A using the same logic.)

The RBA further found that the “funding advantage for the major banks is significantly larger for subordinated debt, perhaps due to the greater potential for losses in the event of a default”, which our research also confirms.

Even in the savings market, where ratings are less salient, a simple comparison of the six- and 12-month term deposit rates offered by AMP, Bank of Queensland, Bendigo & Adelaide Bank, and Suncorp, which all sit in the A band, reveals that they are on average forced to pay 26 basis points more than the majors for this money.

The RBA’s 20 to 40 basis point estimate of the too-big-to-fail funding advantage implies that the majors capture an annual taxpayer subsidy worth more than $5 billion from their implicit government guarantee (using the wholesale liabilities identified in the budget). This makes the majors by far the most publicly subsidised companies in the country, receiving benefits that are more than 10 times larger than the $415 million of support the car industry (a favoured political target) received in 2013.

And none of this analysis accounts for the subsidies inherent in the $200 billion-plus of emergency liquidity all banks can tap in a crisis at a staggeringly cheap rate of just 1.9 per cent via the always-generous RBA

CBA Dials Back Interest Only Loans

The Commonwealth Bank of Australia (CBA) announced changes to interest only transactions for both new owner occupied and investment home loans. It will honour existing applications submitted for assessment by COB Friday 9 June, but the new rules start on Monday 22nd May.

This reflects a response to the recent regulatory tightening. This is in addition to the interest rates rises already imposed in February, March and April.

Effective from Monday 22 May, the bank will offer the following reduced discounts for new owner occupied and investor home loans with interest only payments:

  • A reduced discount offered through the Home Loan Pricing Tool (HLPT) for new home loan and investment home loans with IO payments
  • The elimination of any discount for those who submit a pricing request for new home loan and investment home loans with P&I repayments who later switch to an IO repayment type

CBA’s $1,250 Refinance Rebate for select interest only owner occupier home loans will also end. This rebate will only be available for owner occupier principal and interest home loans via the HLPT.

The bank has also made further LVR changes which will be effective from Saturday 10 July:

  • Reducing the maximum LVR from 95% to 80% for new owner occupier interest only home loans
  • Reducing the maximum LVR from 90% to 80% for new investment interest only home loans

Changes have also been made to repayment types for building and construction loans. These will be effective from 10 July.

  • CBA will no longer accept IO payments for home loan and investment home loans which are construction or building loans. Instead, the loans must have P&I repayments after construction is complete and the loan has been fully funded
  • CBA will permit construction loan applications submitted for full assessment by COB 9 June with IO payments to proceed to funding

They also remind brokers that repayments on P&I construction loans are interest only until building is completed and the loan is fully funded. At this point, payments switch to P&I. This means the bank will apply the lower P&I reference rate to the interest charged during the construction period.

“In March, the Australian Prudential Regulation Authority (APRA) announced the introduction of a new measure to limit the flow of new Interest Only (IO) residential mortgage lending to 30%. Commonwealth Bank is committed to ensuring we meet our customer’s needs while maintaining our prudent lending standards and meeting our regulatory requirements,” the bank wrote in a statement to brokers.

“To help meet these commitments, we are introducing changes that encourage customers to choose principal and interest repayments, where this meets their needs. We are also increasing our already robust monitoring and reporting activities to ensure that where Interest Only payments are selected, they are suitable for customers’ needs.”