Another busy schedule for your editor today as we try to put together the August issue of Australian Small Cap Investigator.
Given our focus on natural gas and LNG over the past twelve months, we’re concentrating this month’s issue on the LNG industry.
We’ll scan our eye over our three ‘Thin Air’ stocks that have massively outperformed the market plus take a look at how small cap investors can start to plan for even bigger returns in 2010.
Today’s news about the Future Fund selling one-third of its stake in Telstra interests us a great deal, but we’ll leave that for either Money Weekend or for next week.
Because today I thought it was time to delve into the Money Morning mailbag.
“Hi,
Great article about lax bank lending. Maybe you will know better than me. I have heard that if FHB doesn’t want to pay Mortgage Insurance they can get a family member to go guarantor. What the… are they trying to bring the whole system down? That can only end badly and the banks know it. They don’t care.
Tell me it ain’t so. Regards, Gary”
Sorry to disappoint you Gary, it is so.
And it’s all because, according to a couple of mortgage brokers we’ve heard from, the banks have reigned in their dodgy lending practices…
What they’ve done is dispense with the 100% mortgage products. Well, that’s OK then isn’t it?
Don’t get too excited.
We’re told the banks have done this to promote their financial responsibility. But, like any unkickable habit, the banks are just getting high elsewhere.
Now they’re dosing themselves up big on Guarantor mortgages. Obviously these are much more financially sound.
In fact it’s more like out with the ‘crack’ cocaine, and in with the heroin.
Let’s see what the self-proclaimed “Home Loan Experts” say about this wonderful product:
Pardon?
But wait, it gets better than that:
“Most lenders will cap the loan amount at 105% or 110% of the purchase price with a family guarantee. One of our lenders can lend up to 200% of the purchase price if there is a good reason to do so…”
We love the use of the word ‘cap.’ We wouldn’t want people exceed 110% would we? Unless that is, they fancy going up to 200%.
Oh, but hang on a minute. This will surely be one of those products introduced by the non-bank mortgage lenders in an effort to grab market share. Let’s check that out…
“St. George Bank uses the term ‘Family Pledge’, CBA uses the term ‘Family Support’ or ‘Family Equity’, Rams uses the term ‘Fast Track’ whereas ANZ and Westpac use the term ‘Family Guarantee’”
Yep, let’s not fool ourselves anymore with the rubbish about Australian banks being financially conservative with their loan book.
They are up to their armpits in rubbish. And don’t forget either, that at best the banks did provide 100% mortgages to almost anyone – especially first home buyers – until about six months ago.
And they’re still providing them, just in disguise. We think we’ve heard the phrase ‘putting lipstick on a pig’ a few times. Guess what, it’s still a pig!
Then we received this email from Money Morning’s resident counselor, Dr. Merv. He wrote:
“Did you know that if you default on your mortgage and you have mortgage insurance the mortgage insurance company will come after you for the money they have had to pay out?”
“In other words even though you have paid the premium for and on behalf of your kind and generous lender the insurer can still come after you for the full amount of what he has had to pay out. The insurer can hardly lose. So how can it be called ‘insurance’?”
“It certainly is insurance for the lender and he gets paid but it still leaves the borrower on the hook and liable.”
Do you know what? That one had slipped by us. In other words, you pay the bank’s insurance costs but you remain uninsured.
So if the property sells below the amount owing, the insurance company can ‘ask’ for their money back.
Now, chances are in a market where there are few repossessions and forced-sells the insurance company will write it off against all their unclaimed policies. But when claims increase…
It could be a problem. Especially if the bank decides to ‘self insure.’ We’d spotted this product the other day but didn’t pay much attention to it.
It was only when Money Morning reader Chris sent us an email that we decided to take a closer look:
“You may be interested to know that CBA can now insure themselves at a cheaper rate to the client via “LDP low deposit premium”!!!”
So while the Commonwealth Bank was happy to claim that it’s exposure was less due to Lenders Mortgage Insurance (LMI), it wasn’t quite so quick to admit it was also self-insuring mortgages.
In other words. It’s taking a premium from borrowers in the eventuality that you default and it needs to cover any losses. To mitigate the losses it takes out an insurance policy… with itself!
Are the banks really that desperate for money that they need to insure themselves with themselves against their own dodgy loans?
Wouldn’t a better form of insurance be not to make the dodgy loans in the first place?
But of course that would mean missing out on interest income and… insurance premium income.
The more we look at the banks business strategies the ‘scarederer’ we get.
And finally, this email from Money Morning reader Don:
“Kris, why don’t you just admit you got it wrong about a property crash. House prices are on the way up and you’ve missed out.”
Well, we’re always prepared to admit when we get something wrong. Only politicians and fools try to cover up their mistakes.
The fact is, the property market is playing out as we expected. The manipulation of it by every branch of government has so far worked as they intended – prices have remained high.
In fact, we’ve even bet on property prices rising. That’s why I tipped a listed property fund in Australian Small Cap Investigator a few months back.
So far it’s only up about 10% which is disappointing to be honest. But I’m still expecting a brief surge at some point over the next six months as irrational exuberance for a property boom takes over from common sense.
I don’t have the space to go back over all the property arguments again today. The simple point is the property spruikers are not using logic when they claim property prices will remain high due to immigration and a ‘chronic’ housing shortage.
We even stumbled across a story in The Australian from about a month ago claiming, “Aussie property about to ride a big wave.”
It contains the usual spin:
“Fundamentally, America has 1.1 million properties in oversupply. In Australia, it’s more than 180,000 in undersupply. We can keep building for 18 months and only catch up to demand.”
We love the magical undersupply argument. Not once have we seen any study or research to support these claims. The argument is skating on thinner ice than a climatically changed polar ice-cap.
Now, apparently there’s a saying among lawyers that “You should never ask a question that you don’t know the answer to.”
Makes sense.
But regardless, here’s a challenge…
Aside from yourself, there are now about another 40,000 people who receive Money Morning every day. I know for a fact there are property bulls and bears among the audience.
Therefore if you have access to authentic research which identifies the ‘chronic’ housing shortage in Australia, please email to the Money Morning mailbag at: moneymorning@moneymorning.com.au
I would be glad to read it and I’m happy to publish the highlights.
Stay tuned for more on this one.
Other Stuff on the Markets
The S&P/ASX200 edged up 0.08% yesterday, while there was better news overnight on Wall Street with the Dow Jones Industrial Average adding 43 points. In Europe the FTSE100 gained 1.16% and the CAC40 added 1.31%.
The price of gold in Australian dollars is trading at $1,132.50, while in US Dollars it is trading at $940.99.
The Aussie dollar strengthened versus the US dollar and Japanese Yen, trading at USD$0.8310, and JPY78.34.
Crude oil closed overnight at USD$72.91.
For the biggest movers on the market yesterday click here…
{ 2 comments… read them below or add one }
This is a consumer law issue. The insurance protects only the bank so it should be charged to the banker with no explicit pass through. It is the same as the fuel surcharge issue on air fares as decided in the judicial process run by the kiwis.
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