An article by Anthony Klan in The Australian of 22 September, quoting Aussie Home Loans principal, John Symond, as sounding the death knell of ‘Low-Doc’ home loans is more than a little sensationalist. It could also be due to the fact that Symond no longer has a total say in what his business does by way of Low-Doc lending.
In lending, we’re taught in the beginning of the five C’s of credit.
This is your personal financial character, or a look at how you have handled debt in the past. Do you pay your bills on time, pay them off early, or do you not manage money well? Who you are, what you do and what you’ve done.
How much debt do you currently have? Can you meet your commitments?
What’s the financial position of the borrower? What do you owe and what do you own?
What type of collateral are you offering in exchange for the funds? What security is offered?
Will the application and use of funds make sense to the lender? Is the purpose sound, legal and provide benefit to the borrower?
Where Low-Doc lending is concerned, Capacity is determined by the borrower, in that the borrower makes a declaration regarding their level of income and their capacity to service the loan they seek. Self-certified lending tends to place Commonsense second on the ladder of the C’s, with Capacity taking the caboose in the credit train. Low-Doc lending requires an astute lender to apply Commonsense in a thorough-going manner, on a much broader scale than simply asking, “does this loan application make sense?” It’s this aspect of Low-Doc lending which has been poorly regarded by many funders over recent years, and can be said to be a major consideration in the so-called Sub-Prime Crisis which originated in the United States of America. Combine poor credit analysis with rampant greed and over-stated profit expectations, and disaster is the cake we bake.
In the retail credit marketplace, the Low-Doc loan exists ostensibly out of necessity. Due to taxation considerations surrounding the GST, self-employed persons were required to register as businesses to claim GST benefits, thereby becoming easily identified as self-employed. Their taxation cycle differed from the PAYG wage earner, which meant the self-employed person couldn’t always provide up-to-date income information in support of loan applications. A niche loan product was born!
With the passage of time, and a good time it’s been over the past decade economically, the Low-Doc has become much more a tool of convenience, rather than one of necessity. With the failure of some very lax credit structures in combination with convoluted financial instruments, resulting in the Sub-Prime Crisis, lenders in the main have lost confidence in each other, their regulators and their marketplace. Confidence has evaporated, and Low-Doc lending is essentially a confidence regime. However, for someone like John Symond to claim that the Low-Doc is dead because the system which created it has collapsed is not only hypocritical, it’s patently untrue. I strongly suspect the statement comes as a direct result of shareholder pressure on Symond. After all, he did recently sell 33% of Aussie to the Commonwealth Bank, so I doubt whether it’s Symond actually making the dead low-doc call.
Financial markets run to patterns or cycles. Close behind every bull, there’s a bear and behind every generation of lenders who learn the lessons of the bear, is a new generation which only knows the ensuing bull that replaces it. That generation of lenders is the current generation. They hurt because they’ve not heeded the warnings of those before them. They’ll learn, but it’s those who come after them who will ensure the cycle continues. It’s happened before and will happen again.
Lessons will be learned, but the Low-Doc loan is here to stay.