Aug 102007

The currently running Parliamentary inquiry into lending approval standards being conducted in Canberra seems to have fingered the mortgagee trustees, Permanent Custodians and Perpetual Trustees as principal movers in repossession actions.

I would hesitate to lay the blame for credit failures which spark mortgagee repossessions at the feet of these trustees. The real fault lies with the institutions which engage the trustee services of these institutions. The Firstmac’s, ING’s and Adelaide Banks – among others – are principally at fault through their credit approval practices and more pointedly, through their often predatory sales practices. The reason personal debt levels in Australia are so high is solely due to the fierce competition between an over-supply of non-bank lenders and absolute plethora of third-party broker referrers in what has traditionally been a bank-oriented lending domain.
Certainly, John Symons and his ilk have given the banks a run of their money, so to speak, in undercutting them on cost, but service is usually the telling factor when dealing with a non-bank institution. Aussie, for example, are not known for their after sales service simply because they employ commission-only sales people who don’t care about the individual client, only the commission they can generate from them. The more they can encourage the applicant to borrow, the greater the commission. This ethos has become standard practice across the finance industry in the past decade, to the point now where anyone wishing to take out a home equity loan to put in a swimming pool, for example, will wind up with either a loan or loan package to at least 80% of the total value of their home, and often more. Whether or not the borrower actually uses the total approved facility is up to them, but like most people when freely disposable cashflow is placed within their reach, they’ll dispose of it. Caveat Emptor.
In addition, mortgage managers and the like – non-bank lenders – don’t actually hold onto and manager the debt books they accrue. From the perspective of growth, they can’t afford to. These debt books are sold off, securitised, which is generally where the trustee entities come into play. The trustees give the debt books an aura of prudency in which investors looking for sound longer term purchases like long term loan books will be looking to invest. The non-bank lender itself will guarantee the quality of the loan book, but only to certain tolerances. In the meantime, as one book is sold off, the drive is always on the build up a new one, and so on, and so on. As the sales drive for greater market share and business growth ramps up, pressure is always placed on those responsible for credit approval to approve greater and greater risks, and hence prudency starts to fall away. I personally know of at least one major non-bank lender which is really starting to feel the pinch of market share diminishing because it’s sales area simply can’t squeeze enough approvals out of sales generated to satisfy projections. The pressure on delegated credit authority holders within the institution is so great that a staff attrition rate of close to 90% was recently reported to me by a friend on the inside.
In my opinion, it’s grossly unfair to finger mortgagee trustees for what is essentially poor credit practices within the institutions to which they sell their trustee services. The real fault lies within the industry itself and within the industry’s greed for greater and greater slices of a pie which isn’t getting any bigger. Like crows over a stinking road kill, sales people will lie, cheat and undercut their opposition on any deal simply so they can get the commission from that deal and then move onto the next carcass/client. For credit practices to be more prudential, more circumspect, lending institutions need to realise that value in lending comes from sound credit analysis and attentive after sales service, not how many sales a given individual can shovel into the maw of credit, then jump up and down on in a bid to get approved.
Regulation and legislation doesn’t breed good lending practices. Good lenders, good credit people take years of experience and market exposure to produce. You cannot create good credit from the pages of a policy manual, but you can at least ensure that good credit decisions are more likely if sales pressures are completely divorced from the approvals process.

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