The Downside Of Cheap Rates
The Sunday Age
Saturday July 5, 1997
THE lowest home-loan rates in decades, feted by politicians and home buyers, are not universally popular. At least one mortgage insurer claims home rates are too low for our own good.
Commercial Union Lenders' Mortgage Insurance general manager, Richard Nott, says low rates are encouraging people to borrow more than they can afford.
"Borrowers are now refinancing relatively easily and adding a whole lot of consumption debt on to their mortgage," Nott says. "Interest rates are at such an abnormally low figure, you are really attracting a new class of home borrower who may not have the discipline (to pay off the loan). If rates do come back with a vengeance, there will certainly be a big escalation in home loan defaults."
CULMI, with other mortgage insurers Housing Loans Insurance Corporation, Royal Sun Alliance and the AMP Society's MGICA, insures banks and other home lenders against loss when borrowers default on payments. A mortgage insurer covers a lender's loss when the sale of a home does not cover the outstanding loan and other expenses.
Lenders last made hefty claims on mortgage insurers in 1991 and 1992, the fallout from record high interest rates of 17.5 per cent reached in 1989, which pushed repayments beyond the affordability of many households.
Claims fell away in 1994, but started climbing again in 1995, increasing further in 1996 even though rates were falling.
MGICA's managing director, Ian Graham, says that over the past 12 to 18 months there has been a steady increase in claims.
Housing Loans Insurance Corp (HLIC) chairman, Peter Bartlett, says he expects 1997 claims to rise above the $29.8 million reported last year.
Royal Sun Alliance Lenders Mortgage Insurance manager, Steven Watters, says depressed property prices and a surge in the amounts of each claim were big contributors to the disappointing results experienced by all mortgage insurers in 1996.
Watters also identifies the tendency for borrowers to overcommit and softer credit standards as factors behind the claims blowout.
Nott agrees. "What worries us is the creeping credit fatigue factor. Everyone, lenders and (their insurers) are being asked to give ground a little bit at a time on all the basic credit criteria to gain competitive advantage," he says. "You could say interest rates are probably too low for some people's own good."
He says given property price volatility, now is not a good time to borrow more than 90 per cent of the value of a house. "It made sense when prices outstripped savings, but now it doesn't."
Nott says CULMI made a strategic decision to avoid insuring these 90 per cent-plus loans in 1995.
That decision, which has resulted in CULMI limiting insurance for these loans to 7 per cent of its $9 billion book, started to deliver earlier this year. CUMLI's "far better claims performance" in the past three months, is due to this positioning strategy, Nott says.
Insuring home loans is a cyclical business and the players are publicity shy - especially at the higher end of the claims cycle. Higher claims equate not only to poor profits, but to headlines about homes being sold from defaulters.
© 1997 The Sunday Age
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