Higher US Mortgage Yields Offset Lowest Jobless Rate Since 2000

The return of a 3% 10-year Treasury yield is making itself known in the housing industry. Markets have already priced in a loss of housing activity to the highest mortgage yields since 2011, according to Moody’s. They conclude that just as it is overly presumptuous to predict the nearness of a 4% 10-year Treasury yield, it is premature to declare an impending top for the benchmark Treasury yield.

Thus far in 2018, the 11% drop by the PHLX index of housing-sector share prices differs drastically from the accompanying 3% rise by the market value of U.S. common stock. In addition, the CDS spreads of housing-related issuers show a median increase of 78 bp for 2018-to-date, which is greater than the overall market’s increase of roughly 23 bp. Finally, 2018-to-date’s -1.97% return from high-yield bonds is worse than the -0.13% return from the U.S.’ overall high-yield bond market. Despite the lowest unemployment rate since 2000, the sum of new and existing home sales dipped by 0.7% year-over-year during January-April 2018. Unit home sales may not soon accelerate by enough to strengthen the case for higher Treasury yields. First-quarter 2018’s average index of pending sales of existing homes contracted by 11.5% annualized from 2017’s final quarter on a seasonally-adjusted basis, while shrinking by 3.7% year-over-year before seasonal adjustment. The recent record suggests that the 10-year Treasury yield will ultimately follow home sales.

March 2018’s 7% yearly drop by the NAR’s index of home affordability showed that the growth of after tax income was not rapid enough to overcome the combination of higher home prices and costlier mortgage yields. March incurred the 17th consecutive yearly decline by the home affordability index. The moving three-month average of home affordability now trails its current cycle high of the span-ended January 2013 by 23%.

Fewest Applications for Mortgage Refinancings since 2000

The highest effective 30-year mortgage yield in seven years has depressed applications for mortgage refinancings. For the week-ended May 18, the MBA’s effective 30-year mortgage yield reached 5.01% for its highest reading since the 5.04% of April 15, 2011. The effective 30-year mortgage yield’s latest fourweek average of 4.95% was up by 63 bp from the 4.32% of a year earlier.

The yearly increase by the effective 30-year mortgage yield’s moving four-week average last swelled by at least 63 bp during the span-ended July 12, 2013. The 10-year Treasury yield’s month-long average would climb from July 2013’s 2.56% to a December 2013 peak of 2.89%. Thereafter, a decline by unit home sales had helped to lower the 10-year Treasury yield to 2.53% by July 2014.

As of May 18, 2018, the Mortgage Bankers Association’s seasonally-adjusted weekly index of applications for mortgage refinancings sank to its lowest reading since December 29, 2000. Nevertheless, it should be noted that the MBA commenced a new sample on September 16, 2011. During the four-weeks-ended May 18, applications for mortgage refinancings sank by 19.6% year-overyear.

Moreover, the latest moving 13-week average of applications for mortgage refinancings is a very deep 77.8% under its current cycle high of October 12, 2012. By contrast, mortgage applications from prospective homebuyers are holding up much better. During the four weeks ended May 18, the MBA’s average index for homebuyer mortgage applications dipped by 0.9% from the contiguous four-weeks-ended April 20, 2018, as the year-over-year increase slowed from April 20’s 6.6% to May 18’s 3.5%.

The sum of new and existing sales of single-family homes sank annually in only nine of the calendar years since 1988. In eight of those nine years, the 10-year Treasury yield’s yearlong average fell in the following calendar year. For the nine years following a drop by single-family home sales, the median annual change for the 10-year Treasury yield’s yearlong average was -41 bp.

In summary, the longer that higher interest rates weigh on business activity and financial markets, the closer is a peak for bond yields. Nonetheless, just as it is overly presumptuous to predict the nearness of a 4% 10-year Treasury yield, it is premature to declare an impending top for the benchmark Treasury yield.

Families in Financial Distress Are More Likely to Stay in Distress

According to the  latest from The St.Louis Fed On The Economy Blog, individuals who were in financial distress five years ago were about twice as likely to be in financial distress today when compared with an average individual.

Many households have experienced financial distress at least one time in their life. In these situations, households miss payments for different reasons (unemployment, sickness, etc.) and eventually file bankruptcy to discharge those obligations.

In a recent working paper, I (Juan) and my co-authors Kartik Athreya and José Mustre-del-Río argued that financial distress is not only quite widespread but is also very persistent. Using Federal Reserve Bank of New York Consumer Credit Panel/Equifax data, we reported that individuals who were in financial distress five years ago were about twice as likely to be in financial distress today when compared with an average individual.1

Consumer Bankruptcy

In this post, we focus our attention on a very extreme form of financial distress: consumer bankruptcy. We obtained financial distress data from the Survey of Consumer Finances (SCF), conducted by the Board of Governors. The data span from 1998 to 2016 with triennial frequency, and the respondents who are younger than 25 or older than 65 have been trimmed.2

We first measured the share of households that had previously experienced an episode of financial distress by looking at people who filed for bankruptcy five or more years ago.3 The figure below shows that the share of households with past financial distress increased from approximately 6.6 percent in 1998 to 12.2 percent in 2016.

 

past distress

 

We then measured current financial distress by computing the share of households that delayed their loan payment on the year the survey was conducted.4 (We recognize that this measure is less extreme, as only a share of households that are late making payments will end up in bankruptcy.)5

The figure below shows that while there are minor fluctuations in the share of households with late payments throughout the sample period, the numbers remained around 8 percent.

current distress

 

Finally, we created a ratio to measure the persistence of financial distress. It compares the share of households with late payments among households that declared bankruptcy five or more years ago to the share of households with late payments the year the SCF was conducted.

If financial distress was not persistent at all, both shares would be equal, and the ratio would be one. Thus, a value greater than one indicates the persistence of financial distress. The figure below shows the evolution of the persistence of financial distress over the years.

distress persistance

The ratio fluctuates around 1.5, implying that the households that have encountered an episode of financial distress in the past are 1.5 times more likely to delay payment today, compared to average households.

Australians Warned to Beware of Phone Scams

Australians are urged to be on guard against unscrupulous, unsolicited callers, claiming to represent the Australian Banking Association and asking for bank details to issue a ‘refund’, survey customer satisfaction or record banking history.

According to the ACCC every year 33,000 Australians are targeted by scammers in this particular way, with callers pretending to represent banks and other financial institutions, with recent estimates placing the cost to victims at over $4.7 million. This scam targeting the ABA is ongoing and was first reported in 2016. Banks often encounter this type of scam, with callers claiming to contact customers on their behalf.

Some of the techniques used by these scammers include:

  • Asking who you bank with, how long you have banked with them and your level of satisfaction
  • Asking for personal and banking details, including your name and driver’s licence number, bank account or credit card number, PINs or internet banking login
  • Telling people they are owed a ‘refund’ for overcharged bank fees but they have to pay a fee for it. They ask people to send money via post or Western Union.

Executive Director of Consumer Policy Christine Cupitt said that it was important customers remain vigilant against scammers even if they claim to be from reputable organisations such as banks or associations.

“We’ve seen a concerning rise in the number of people falsely claiming to be from the ABA, preying on unsuspecting victims and asking for them personal financial details,” Ms Cupitt said.

“The ABA, or any member bank, will never call members of the public seeking information about their personal bank accounts or security information.

“If you think you’ve given your personal information to a scammer we urge you to urgently contact your financial institution.

“It’s vitally important that Australians keep their financial identity safe by following important measures such as not giving out your PIN, deleting spam e-mails, keeping antivirus software up to date and not responding to requests from unknown phone numbers.

“This week is ‘National Scams Awareness Week’, a timely reminder that if you think you’ve been the target of scammers, or indeed the victim of one, you should report it immediately to ACCC’s www.scamwatch.gov.au,” she said.

Tips to protect your financial identity

  • Don’t provide your financial details, including PIN or internet banking login or password to anyone.
  • Guard the following identity information carefully and only provide to trusted people and entities: date of birth, current address, driver’s licence number and passport details.
  • Delete spam and scam e-mail – if the offer sounds too good to be true, it probably is.
  • Keep your anti-virus and firewall software up-to-date.
  • Do not respond to requests that ask you to call unknown or unverified phone numbers.

Be very careful about clicking on links in emails. Do not use links to access trusted websites. Enter the correct address for websites into the address bar of your browser.

Westpac Dodges Rate Rigging Charges

The Federal Court has determined ASIC failed to prove Westpac manipulated the bank bill swap rate, but the judge found the bank engaged in unconscionable conduct, via InvestorDaily.

Justice Beach of the Federal Court has handed down a 643-page judgement on a civil court case brought by ASIC that alleged Westpac manipulated the bank bill swap rate (BBSW).

In his judgement, Justice Beach found ASIC has “not made out its case against Westpac” concerning market manipulation or market rigging.

However, he did find that Westpac engaged in unconscionable conduct under s12CC of the ASIC Act on four occasions (6 April 2010, 20 May 2010, 1 and 6 December 2010) “by trading Prime Bank Bills in the Bank Bill Market with the dominant purpose of influencing yields and where BBSW is set”.

Westpac was also found to have contravened paragraphs 912A(1)(a), (c), (ca) and (f) of the Corporations Act, which relate to the obligations of financial services licensees to operate efficiently, honestly and fairly.

ASIC did not make out its case in respect to any of its other claims, said the judgement.

In his summary, Justice Beach said Westpac had failed to take “reasonable steps” to ensure its representatives did not engage in trading in Prime Bank Bills with the “sole or dominant purpose of manipulating the BBSW”.

“Further, in my view Westpac failed to ensure that its traders were adequately trained not to engage in trading with such a sole or dominant purpose,” said the judgement.

“This should have been reinforced and stipulated to them orally and in writing. In those circumstances, Westpac also contravened s 912A(1)(f).”

Will The Digital Economy Be Taxed?

From The Conversation.

The government is reportedly considering a new tax on the digital economy. While no details of the tax are available yet, the digital services tax recently proposed by the European Commission may give us an idea what the tax might look like.

In essence, the proposal will impose a 3% tax on the turnover of large digital economy companies in the European Union. Similar ideas have been suggested in the UK and France.

The current international tax system was designed before internet was invented, so this new tax is a response to this problem. Under the current system, a foreign company will not be subject to income tax in Australia unless it has a significant physical presence in the country. The key word here is “physical”.

It is well known that modern multinationals such as Google can derive substantial revenue and profits from Australia without significant physical presence here. It is no surprise that this 20th-century tax principle struggles to deal with the 21st-century economy.

This problem is well known but the solution is far more elusive.

Attempts to tax digital companies

The best solution in response to the rise of the digital economy is to reword the laws to take more into account than the “physical” presence of a company in the international tax regime. However, this reform would require international consensus on a new set of rules to allocate the taxing rights on the profits of multinationals among different countries.

In particular, it would mean more taxing rights for source countries where the revenue is generated. The formidable political resistance is not difficult to imagine.

The OECD has attempted to address this fundamental issue, but in vain so far. Its report on the taxation of digital economy in the Base Erosion Profit Shifting project did not provide any recommendation to improve the system at all. The recent report on its continuing work on the digital economy again shows little progress.

While the EU also recognises that the long-term solution should be a major reform of the international tax regime, the slow progress of the OECD’s effort is seriously testing the patience of many countries. Therefore, the EU has proposed the digital services tax as an “interim” measure.

Google as an example

The Senate enquiry into corporate tax avoidance revealed that Google is deriving billions of dollars of revenue every year from Australia but has been paying very little tax. In particular, the revenue reported to the Australian Securities and Investments Commission in Australia in 2015 was less than A$500 million, with net profits of A$47 million.

The government responded by introducing the Multinational Anti-Avoidance Law in 2016, targeting the particular tax structures used by multinational enterprises such as Google.

Google Australia’s 2016 annual report states that the company has restructured its business. Though not stated explicitly, the restructure was most likely undertaken in response to the introduction of this law.

As a result of the restructure, both revenue and net profits of Google Australia increased by 2.2 times.

However, here is the bad news. Though Google has reported significantly more profits in Australia, the profit margins of the local company remain very low compared to its worldwide group. For example, the net profit margin of Google Australia was 9% while that of the group was 22%.

Of course, a business may have different profit margins in different countries for genuine commercial reasons. However, based on our understanding of the tax structures of these multinationals, it’s likely that significant amounts of profits are booked in low-tax or even zero-tax jurisdictions.

This example suggests that while the Multinational Anti-Avoidance Law is achieving its objectives, it alone is unlikely to be enough.

A digital services tax in Australia

The digital services tax is a turnover tax, not an income tax. This circumvents the restrictions imposed by the current international income tax regime.

The targets of this tax include income of large multinationals from providing advertising space (for example, Google), trading platforms (for example, eBay) and the transmission of data collected about users (for example, Facebook).

If Australia follows the model of the digital services tax, the new tax may generate substantial amount of revenue. For example, Google Australia’s revenue reported in its 2016 annual report was A$1.1 billion. A 3% tax on that amount would be A$33 million.

Along with the digital services tax proposal, the EU proposed the concept of “significant digital presence” as the long-term solution for the international tax system. The exact details are subject to further consultation. However, the relevant factors may include a company’s annual revenue from digital services, the number of users of such services, and the number of online contracts concluded on the platform.

The destiny of this proposal is unclear, but it’s likely to be subject to fierce debate among countries. In any case, the proposals of the digital services tax and the digital presence concept suggest there may be a paradigm shift in the thinking of tax policymakers in response to the challenges imposed by the digital economy that would be difficult, if not impossible, to resist.

Author: Antony Ting, Associate Professor, University of Sydney

Cash Converters pays $650,000 due to poor debt collection practices

ASIC says an ASIC surveillance found that Cash Converters Personal Finance Pty Ltd (‘Cash Converters’) had systematically failed to meet regulatory guidelines on debt collection practices, including by too frequently contacting consumers.

ASIC found that as a result of poor internal controls and policies Cash Converters routinely breached Regulatory Guide Debt collection guideline: for collectors and creditors (RG 96), which recommends that consumers be contacted regarding a debt not more than three times per week or 10 times per month. These guidelines are based on legislative prohibitions on harassment and coercion.

Cash Converters also provided incorrect information to consumer credit reporting agency Equifax. This may have resulted in up to 38,500 customers being reported with inaccurate amounts owing over a one-month period.

In response to ASIC’s concerns, Cash Converters is outsourcing all debt collection work to a specialist third party debt collector. ASIC has also imposed licence conditions on Cash Converters to require it to obtain ASIC’s consent before returning debt collection activity in-house. Cash Converters has also worked with Equifax to ensure all incorrect credit listings have been removed.

The company has paid a $650,000 community benefit payment to help fund the National Debt Helpline. The Helpline assists consumers who have trouble managing debt or paying bills.

ASIC Deputy Chair Peter Kell said, ‘Consumers expect to be treated fairly and in a manner that complies with consumer protection laws. ASIC expects all financial service providers to have appropriate systems and controls in place to ensure that debt collection practices are consistent with the Guidelines. It is also critical that licensees ensure that credit information provided to credit bureaus is accurate.’

Consumers seeking assistance can contact the National Debt Helpline on 1800 007 007.

Background

Safrock Financial Corporation (Qld) Pty Ltd, a related company to Cash Convertors, was responsible for providing the incorrect information to consumer credit reporting agency Equifax. The credit listings indicated the total amount of the debt owing by consumers, rather than the outstanding balance.

ASIC has issued Regulatory Guide RG 96 Debt collection guideline: for collectors and creditors setting out guidance to help creditors who are directly involved in debt collection and specialist external agencies who provide debt collection services to comply with their legal obligations under Commonwealth consumer protection laws.

The National Debt Helpline, coordinated by Financial Counselling Australia, is a not-for-profit service that assists consumers in managing debt.  Approximately half of the calls received by the Helpline involve debt collected by a debt collection agency.  The volume of calls for the Helpline has increased each year since the inception of the Helpline in 2012.  The Helpline currently receives, on average, over 14,000 calls per month.

ASIC’s MoneySmart website has information about dealing with debt collectors, including how and when they can contact consumers. MoneySmart also provides guidance for consumers about checking and correcting any wrong listings on their credit report.

Federal Court finds Westpac traded to affect the BBSW and engaged in unconscionable conduct

ASIC says Justice Beach of the Federal Court today found that Westpac engaged in unconscionable conduct under s12CC of the Australian Securities and Investments Commission Act 2001 (Cth) by its involvement in setting the bank bill swap reference rate (BBSW) on 4 occasions.

In civil proceedings brought by ASIC, the Court found that on these occasions, Westpac traded with the dominant purpose of influencing yields of traded Prime Bank Bills and where BBSW set in a way that was favourable to its rate set exposure.

The court also found Westpac had inadequate procedures and training and had contravened its financial services licensee obligations under s912A(1)(a), (c), (ca) and (f) of the Corporations Act 2001 (Cth)

His Honour said in his judgement, “Westpac’s conduct was against commercial conscience as informed by the normative standards and their implicit values enshrined in the text, context and purpose of the ASIC Act specifically and the Corporations Act generally.”

A further hearing of this proceeding on penalty and relief will be held on a date to be determined.

Background

ASIC commenced legal proceedings in the Federal Court against the Australia and New Zealand Banking Group (ANZ) on 4 March 2016 (refer: 16-060MR) and against National Australia Bank (NAB) on 7 June 2016 (refer: 16-183MR).

On 10 November 2017, the Federal Court made declarations that each of ANZ and NAB had attempted to engage in unconscionable conduct in attempting to seek to change where the BBSW was set on certain dates and that each bank failed to do all things necessary to ensure that they provided financial services honestly and fairly. The Federal Court imposed pecuniary penalties of $10 million on each bank (refer: [2017] FCA 1338).

On 20 November 2017, ASIC accepted enforceable undertakings from ANZ and NAB which provides for both banks to take certain steps and to pay $20 million to be applied to the benefit of the community, and that each will pay $20 million towards ASIC’s investigation and other costs (refer: 17-393MR).

On 30 January 2018, ASIC commenced legal proceedings in the Federal Court against the Commonwealth Bank of Australia (CBA) (refer: 18-024MR).

On 8 May 2018, CBA announced that ASIC and CBA reached an in-principle agreement to settle ASIC’s claims (refer: CBA ASX Announcement). CBA and ASIC will be making an application to the Federal Court for approval of the settlement.

ASIC has previously accepted enforceable undertakings relating to BBSW from UBS-AG, BNP Paribas and the Royal Bank of Scotland (refer: 13-366MR, 14-014MR, 14-169MR). The institutions also made voluntary contributions totaling $3.6 million to fund independent financial literacy projects in Australia.

In July 2015, ASIC published Report 440, which addresses the potential manipulation of financial benchmarks and related conduct issues.

On 28 March 2018, Parliament passed legislation to implement financial benchmark regulatory reform.

On 21 May 2018, the new BBSW calculation methodology commenced, calculating directly from market transactions during a longer rate-set window and involving a larger number of participants. This means that the benchmark is anchored to real transactions at traded prices (refer: 18-144MR).

Mortgage Arrears Get More Severe

The latest data from S&P Global Ratings using their Mortgage Performance Index (SPIN) to March 2018 shows a rise in arrears, and significantly a hike in 90+ defaults.  WA and NT continue their upward trends.

Here is the S&P chart, with the value of securitised mortgages in the pools falling. Overall defaults increased to 1.18% in March from 1.16% in February.

Arrears more than 90 days past due made up around 60% of total arrears in March 2018, up from 34% a decade earlier. This shift partly reflects a change in the reporting of arrears for loans in hardship that came in response to regulatory guidelines. Even accounting for this, however, there has been a persistent rise in this arrears category, though the level of arrears overall remains low.

Arrears movements were mixed nationwide. Home loan delinquencies fell in New South Wales, Queensland, South Australia, and the Australian Capital Territory in March. Of note, mortgage arrears in South Australia appear to have turned a corner; the state’s March 2018 arrears of 1.35% are well down from a peak of 1.81% in January 2017. This reflects a general improvement in economic conditions in South Australia, in line with national trends. Western Australia remained the state with the nation’s highest arrears, sitting at 2.37% in March.

The trends clearly show persistent issues in WA, which chimes with the recent bank disclosures. The question is of course whether we will see defaults rising in other states as lending standards are tightened.

And I recall Wayne Byers recent comment to the effect that at these low interest rates, defaults should be lower!

Fox Symes pays $37,800 for misleading advertising

ASIC has issued three infringement notices to debt management firm Fox Symes and Associates Pty Ltd (Fox Symes) for making potentially misleading statements in its advertising. The company has paid a total of $37,800 in penalties.

ASIC took action against Fox Symes after it made a number of potentially misleading representations in banner advertisements, Google ads and on its website. These representations included ‘Free Debt Assistance’,‘Reduce Debt in Minutes’ and ‘15sec Approval’.

ASIC was concerned that such statements misrepresented the cost and speed of Fox Symes’ debt management services.

ASIC Deputy Chair Peter Kell said ‘Debt management firms are often engaging with particularly vulnerable consumers who are seeking assistance with their debts. They should be careful not to misrepresent their services using high impact terms like ‘free’, ‘minutes’ and ‘seconds’ suggesting that debt assistance will be quick and at no cost.’

Background

‘Free Debt Assistance’ appeared in a banner advertisement and on the Fox Symes website. Fox Symes did not disclose to consumers that there was a limit to the ‘free debt assistance’ and that charges apply for most of Fox Symes’ services. The ‘free’ component referred to the initial first phone consultation.

‘Reduce debt in minutes’ appeared in banner advertisements. As Fox Symes’ services generally require engagement with third parties, a reduction in debt cannot feasibly be achieved in minutes, seconds or any other similar short period of time.

‘15sec approval’ appeared in Google paid Adword results. Where Fox Symes provides credit services, the responsible lending requirements under the National Consumer Credit Protection Act 2009 (Cth) apply. Approval could not be provided within such short timeframes.

Fox Symes voluntarily amended its advertising once ASIC raised its initial concerns.

Fox Symes is the holder of Australian Credit Licence 393 280 which authorises it to engage in credit activities other than as a credit provider.

Fox Symes was issued with three infringement notices for the representations. Each infringement notice was for a penalty of $12,600.

The payment of an infringement notice is not an admission of a contravention. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection laws.

More Go Negative On Housing

In Australia, lending conditions are tightening  and we are already seeing the housing market slow in major cities. It is tricky to determine the extent of any fall ahead, and most predictions will of course be wrong. But the more significant factor in play is the significant change in the atmospherics around the housing sector. More are going negative. And when the largest lender in Australia signals they expect a fall, even mild, this is significant.

Recently Morgan Stanley said it is predicting property prices could fall by about 8% in 2018, and lending by more than a third.

Morgan Stanley suggests there’ll not only be further price weakness in the months ahead, but also the likelihood of renewed softening in building approvals. It says these two factors will likely weigh on household consumption and building activity, seeing Australian economic growth decelerate, rather than accelerate, this year.

CBA has also gone negative on housing, now forecasting a mild correction. Gareth Aird, senior economist at CBA says that Australian residential property prices have fallen over the past six months. Additional declines appear likely over the next 1½ years due to a further tightening in lending standards, a continued lift in supply, potentially higher mortgage rates and more rational price expectations from would-be buyers. But he says a hard landing, however, looks unlikely and “is not our central scenario”.

Stepping through the argument he posits first dwelling prices go through both long-run super cycles as well as shorter-term cyclical trends.  The recent evidence suggests that Australia’s latest residential property short-run cycle has come to an end.  After a little over five years of incredibly strong property price growth, driven by Sydney and Melbourne, dwelling prices have been deflating.

It is our view that prices will to continue to deflate over the next 1½ years.  Credit standards are likely to be further tightened, supply will continue to lift, mortgage rates are more likely to go up than down and buyer expectations have adjusted downwards from exuberance to more rational levels.  We do not expect a hard landing, however.  Population growth, driven by net immigration, is expected to remain strong.  And rental growth is still positive, which ensures yields look reasonable in a low interest rate world.  We also expect the unemployment rate to gradually drift lower, which means that the risk of default is low.

Author and economist Harry Dent thinks property prices could fall even more. Harry is the editor of Harry Dent Daily and has been recently touring around Australia.

And, as he told Australian Property Investor recently, ‘the real estate bubble is like a popcorn popper with different markets frothing over and peaking at different times, but all will burst ultimately.’

We can consider ourselves lucky if the property market corrects by only 10–20%. He has consistently been negative on Australian property.

“Your problem is you’ve got the second highest real estate costs compared to income in the world. I see Australia as the best house in a bad neighbourhood, but you can’t escape a global crisis.

“I think this time your real estate will come back 20, 30, 40, 50 per cent. That’s good. When young people have to pay 12 times their incomes for a house, that’s not good, so this is where the reset needs to come. I think you will have a recession this time.”