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Low docs: An accident waiting to happen?

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From MORTGAGE MIX - Thankyou to Tim Neary for this good article on the Royal Commission and Lo Doc Sub Prime Debate. 
17 Aug 2012

Macrobusiness published an interesting article recently suggesting Australia’s claim to having a conservative (and safe) banking sector have ‘taken a bath’ recently, as evidence emerges of our own low doc driven sub-prime lending scandal.

A video link from the article suggests in the run up to the GFC, Australian banks and other home-grown lenders abused the system of low doc loans; designed for small businesses but sold “by the thousands” to pensioners, single mums and people on welfare.

It might sound shocking, but opinion on the subject is firmly divided.

In response to the subprime scandal reference one reader left this pointed comment: “Sub-prime???? Pffffffft you guys are so 2007…”

One of the industry’s leading low doc aficionados, Pepper’s Mario Rehayem, is also thumbing his nose at the notion. He has been ever since ASIC published its first broker audit into how the new NCCP rules are tracking.

At a function last week he stood before a group of brokers confirming the integrity of the Australian non-conforming sector. It might be low doc, he said, but it’s far from being low grade. Affordability is still the primary consideration. He’s a slick presenter, pretty convincing too and easy to believe.

But there is another pundit worth a second glance who is less won over.  

CreditED’s Kym Dalton is convinced Australia’s current focus on low doc lending practices is unsound, and its likely contagion effect may knock-on into other forms of lending.  

He’s not alone either. There’s already a call from National Party Senator John Williams for a Royal Commission into low doc lending practices. But what’s done is done, Dalton concedes, although he recommends brokers and lenders persisting with all forms of specialised lending mortgages (including low doc)’revisit their responsible lending checklists’.

The MFAA’s Phil Naylor has joined the debate as well – rejecting calls for a Royal Commission into the Australian mortgage industry.

It’s not necessary he says. Like the polished Rehayem, and the earlier Pffffffft commentator (someone called ‘inigma_’), Naylor is suggesting the naysayers have a have confused our low doc loans with that other sub-prime crisis found only in the US (and other overseas markets).

“There is no evidence of such sub-prime lending in Australia,” Naylor contends. ‘Such’ is the operative word here, obviously. There has been some application fraud in the low doc space, he says, but only “miniscule” amounts of it.   

What do I think? Have the Commission. Do it. If there’s nothing to find, it’ll come back clean. If not, we’ll all be better off.
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  • doyla66
    doyla66 Sunday, 19 August 2012

    Lisa, another gem. Where do you find them?

  • doyla66
    doyla66 Sunday, 19 August 2012

    Lisa, another gem. Where do you find them?

  • doyla66
    doyla66 Sunday, 19 August 2012

    Thanks John :) Searching on Twitter for people I should be following, who are into the same things as we are here,and looking at what they're saying.
    Re Mortgage Mix - Some really good balanced reporting and Macro Business is also really good - love the comments.
    (I'm surprised that no one commented on Tim's article in the actual MM site ... I thought it was a good spread and fair treatment.)
    Often articles refer to other articles ... and so on.
    Just reading up on the Doco "Inside Job" which received awards for the analysis of the GFC.
    "the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption."
    If a person wanted to understand whether we have a subprime crisis or whether we have something closely related and define the similarities and differences, that would be a good place to start ...

    The internet sure beats the Encyclopaedia Britannica for quick research :)

  • doyla66
    doyla66 Sunday, 19 August 2012

    Sounds good Lisa, I'll follow up in the morning. Keep smiling:D

  • Denise
    Denise Sunday, 19 August 2012

    The "Inside Job" was a book which had a great impact on my in 1993 re white collar crime and the Savings and Loans Scandal in America, written by Mario Pizzo, Mary Fricker and Paul Muolo, pub by McGraw Hill 1989. It was a unique insight into the capitalistic and systemic corruption we are witnessing today in the financial markets. It was the only authority published of its kind at that time, written by three journalists who uncovered the initial stages in 1983 during the Reagan Administration. It has had a huge impact on my life and my direction.

    I suggest you all try and get second hand copy for $1 on Amazon.
    [email protected]
    Twitter @DeniseBrailey

  • doyla66
    doyla66 Sunday, 19 August 2012

    It's interesting to hear that Pepper's chap has thumbed his nose at the problem in consideration of the fact that his company purchased a $5 billion debt portfolio from GE before GE left the country last year, (GE was unable to continue lending in Australia in light of its refusal to renew its license under the requirements of the stricter National Consumer Credit Protection Act 2009 (NCCP), prohibiting it from pursuing its, previous unethical lending practices. GE's repeated run-ins with ASIC go to establish this point), and yet prior to the purchase, Pepper failed to go through the proper assessment processes required under the NCCP to establish that credit contracts were 'not unsuitable' for previous GE customers. Pepper seems to have believed that it would simply be business as usual and that no one would ever pick up on their failure.

    How can this chap from Pepper make the claim that the low-doc bag they're holding is not 'low grade' when they haven't even checked to see what's in the bag? Pepper is trying to put the message out that it is seeking to do quality deals but then its latest promo to undercut any already approved loan deal with lower rates would appear to contradict that position, wouldn't it?

    That Pepper apparently did not do the adequate due diligence required prior to purchasing the GE bag of tainted paper, will make it interesting to see how the matter unfolds. I have the feeling that they are going to be the ones left holding the bag, so to speak. GE, it appears, has sold them a pup.

    I imagine by now, Pepper is beginning to find out that loans amongst the $5 billion portfolio were unsuitable from the time of their formation. Loans prior to 2008 that were often 'fixed' by brokers and other agents, through the commission of forgery on the LAFs and other supporting documentation, must be starting to come to light and causing some headaches down at Pepper's cushy new offices.

    Like FirstMac, Pepper too is the spawn of ex-Macquarie Bank executives that flew the coop to start their own money making machines. Time may show that all that glitters in the eye of an ex-Mac exec is not gold and that sometimes, it's only fool's gold.

    In relation to Pepper's purchase of GE's old debt book, all I can think is if they'd spent less time gloating over the size of the deal to all the industry media and more time studying the detail of what they were getting themselves into, they probably would not be facing the problem they must now realise they have. As the old legal maxim goes, caveat emptor (buyer beware).

    Then again, it could also be part of a bigger plan, such as a tax and / or insurance right-off, we will probably only know in time unless some good insiders decide to blow the whistle. It will be interesting to see what both Pepper and GE file as tax returns for last year and this year. I'll wager there is a bog right down in there somewhere.

  • doyla66
    doyla66 Sunday, 19 August 2012

    Regarding the book, 'Inside Job', Matt Damon made it into an excellent documentary as well, if people are interested. Some of the people he interviews are very credible on the topic. Paul Volcker and George Soros being just two of those included.

    Watch the Trailer here:

  • doyla66
    doyla66 Monday, 20 August 2012

    EXACTLY Last-Laf "Loans prior to 2008 that were often 'fixed' by brokers and other agents, through the commission of forgery on the LAFs and other supporting documentation, must be starting to come to light and causing some headaches down at Pepper's cushy new offices.
    Our old loan 2007 has us asking Peppers questions - Our LAF's (still waiting on all copies) is full of errors.
    Peppers cannot profit from fraud - We want our money back thanks!

  • doyla66
    doyla66 Monday, 20 August 2012

    Re; las laf: "claw back" provisions? some form of undertaking the loan book is purportedly "clean"??? Back room deals going on here. . .the consortium members are fully aware of the likely % toxic assets within that book. . .some sort of positioning to "cover up" the scandal being worked out "between the boys(club)??? They're all in it up to necks. . .so why do due diligence spending $5billion, anyone see actual "cash" change hands. . .maybe hidden form "constructive trust" by way of claw backs & discounted valuations etc. . .side deals etc etc etc ????? Royal Commission to work out these babies I'm afraid!!!

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