Difference b/w Subprime lending & FHB Grant

Hi,

While I continue to try and understand the GFC, I keep reading how we are different here and one thing that keeps being reiterated is that we did not have subprime lending to the degree in the US.

While I agree with this could someone please correct me if what I state is wrong.

Subprime lending was to allow those that could not otherwise secure or afford a normal mortgage to become home owners.
Subprime lending was the result of government regulation to stop racial discrimination in lending, forcing banks to loan to people that they might have otherwise passed over.
Subprime lending was the last ditched effort by the mortgage industry to find new customers at any cost.
Subprime lending became a problem when asset prices started to fall.

First Home Buyers grant was established to help/assist those that otherwise could not afford to purchase property a helping hand - loaning to minority groups.
Most FHB purchase with high LVR's - can they really afford to purchase
FHB and others have participated in Low Doc Loans - again a tool that was initially valid is quickly manipulated to give money to those that cannot afford it if asset prices don't rise.
FHBG and subprime loans were the result of Government intervention in what is meant to be a free market.

If asset prices start to fall through reduced GDP and higher unemployment levels then isn't this the trigger that started the melt down in the US.

The only property market that seems to be growing is the FHB, if the grant is removed, this market will suffer the same fate as those markets above the magic $500,000 mark.

What will happen if IR returned to 7-8%, will those FHB be able to afford their mortgages?

So while they are not exactly the same I think the results will play out the same.

I wonder, if the FHBG did not exist would the current market conditions be different. I think the intentions of the FHBG are valid, unfortunately I think in the current global situation it is only getting those that can least afford it into a position that may be extremely difficult to maintain in the near future. I see that both the US and AUS markets/ governments have done what is necessary to milk the last ride of global asset growth geared by debt in property that simply got out of hand.

Why is it necessary for Governments to intervene in private industries (banking/ property) only when they going down the tube with grants and loans, a free market should be left to it own devises or do we not live in a free market.

Before I get flamed, I am simply asking for other peoples opinion on this matter. Yes, I own an IP and have just sold my PPOR and are renting and are neither a bull or a bear just someone who tries to be realistic with the current situation today and in the future.

Benjamin

Satanoperca said:

Subprime lending was to allow those that could not otherwise secure or afford a normal mortgage to become home owners.

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Many, if not most, were credit impaired.i.e. they had a bad repayment history to start with.

Satanoperca said:

Subprime lending was the result of government regulation to stop racial discrimination in lending, forcing banks to loan to people that they might have otherwise passed over.

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They were passed over because they were credit impaired

Satanoperca said:

Subprime lending was the last ditched effort by the mortgage industry to find new customers at any cost.

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Maybe

Satanoperca said:

Subprime lending became a problem when asset prices started to fall.

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Yes, but it became a problem when IR's returned to their 'normal' level off the honneymoon rates they signed up at. This was OK when CG allowed refi's to get cash out to make payments but yes, then the GC music stopped and they had to fund real IRs with real money.

Satanoperca said:

First Home Buyers grant was established to help/assist those that otherwise could not afford to purchase property a helping hand - loaning to minority groups.

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No, FHBs are not credit impaired.

Satanoperca said:

Most FHB purchase with high LVR's - can they really afford to purchase

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Yes they can afford to service repayments (same as rent now anyway) but may have trouble saving up the required deposit.

Satanoperca said:

FHB and others have participated in Low Doc Loans - again a tool that was initially valid is quickly manipulated to give money to those that cannot afford it if asset prices don't rise.

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FHBs for the most part use full doc loans not lo-doc . It is typically investors who participate in lo-doc. They use all sorts of tools available to them to build large portfolios. Even so, lo-docs are a minor % of all loans written.

Satanoperca said:

The only property market that seems to be growing is the FHB, if the grant is removed, this market will suffer the same fate as those markets above the magic $500,000 mark.

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Maybe. But remember the USA had 16M homes too many. In Aust. we are building 50,000 homes short each year. Demand is different.

Satanoperca said:

What will happen if IR returned to 7-8%, will those FHB be able to afford their mortgages?

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Some will, some won't. Remember the banks allow 2% on top of current IR to calculate serviceability. They can fix IRs too.

Satanoperca said:

I wonder, if the FHBG did not exist would the current market conditions be different.

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Probably.

Satanoperca said:

Why is it necessary for Governments to intervene in private industries (banking/ property) only when they going down the tube with grants and loans, a free market should be left to it own devises or do we not live in a free market.

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We don't live in a free market.

Cheers Benjamin

No I think its fundamentally different.

I think it very unlikely that any bank will lend on a no doc basis. Subprime was about abusive no doc or falsified low doc.

FHOGers will still have to demonstrate serviceability. Subprimers never had serviceability.

Yes some FHOG may get burnt when rates go back up again. But that's looking like a very long time away.

Hi, maybe a real life example will clarify the situation.

Someone I know is about to sign a contract for H&L package.

Builder's price = $321000 [don't think that includes stamp duty etc]

Bank has approved $290000 loan.

So assuming 5% interest, repayment interest = $14500 p.a.

They're currently paying about $1300 per month rent. = $15600 p.a.

Husband took a settlement from Work Cover [about $70000 cash] and wife receives Centrelink benefits.

As far as I can see, what they pay for housing if they buy their own brand new home and what they pay for renting is about the same. Only difference is if the bank requires them to pay P&I, then they might have to fork out more.

KY

While I agree with some of the sentiment, The FHOG is one thing, the US Subprime issue is a combination of about 10 items that worked together as a system.

No real comparison there I feel

ta
rolf

I think that one of the major factors leading to subprime was the fact that people could just give the keys to the bank and walk away, with the rest of their possessions left to them and no debt hanging on them.

Whereas in Australia you cannot do that, if the sale price of home doesn't cover your debt, you'll have to come up with the remainder.
Plus historically, owning a home in Aus has greater sentimental value and people try to hold on to it as much as they can, and avoid repossession at all costs.

Satanoperca said:

First Home Buyers grant was established to help/assist those that otherwise could not afford to purchase property a helping hand - loaning to minority groups.

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No it wasn't. It was forced on Howard when he proposed the GST as a way to pay back some of the GST incurred by homebuilders. It was paid, once only, whether you were buying now or established.

Howard didn't give a rat's about "strugglers".

Here is an excellent synopsis on Sub prime and talks about the Australian way of encouraging first home buyers.

This is steve Keens take on it so it may upset some;

http://www.crikey.com.au/Business/20090223-Keen-Neoliberalism-and-economic-breakdown.html

Strannik said:

I think that one of the major factors leading to subprime was the fact that people could just give the keys to the bank and walk away, with the rest of their possessions left to them and no debt hanging on them.

Whereas in Australia you cannot do that, if the sale price of home doesn't cover your debt, you'll have to come up with the remainder.
Plus historically, owning a home in Aus has greater sentimental value and people try to hold on to it as much as they can, and avoid repossession at all costs.

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Yeah that is what I thought the difference was. We have to pay back (or face bankrupcy which carries a much bigger stigma here)
Lo-Doc is covered by the banks with LMI $$ and (in my experience valued tougher)

kum yin lau said:

Hi, maybe a real life example will clarify the situation.

Someone I know is about to sign a contract for H&L package.

Builder's price = $321000 [don't think that includes stamp duty etc]

Bank has approved $290000 loan.

So assuming 5% interest, repayment interest = $14500 p.a.

They're currently paying about $1300 per month rent. = $15600 p.a.

Husband took a settlement from Work Cover [about $70000 cash] and wife receives Centrelink benefits.

As far as I can see, what they pay for housing if they buy their own brand new home and what they pay for renting is about the same. Only difference is if the bank requires them to pay P&I, then they might have to fork out more.

KY

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KY, i assume that the husband is not permanently incapacitated? Good luck to them, but the most amazing part of this story IMO is that an unemployed couple can borrow 290k and that this is >90% LVR!! And i thought lending criteria was tightening.

There's way too many differences to compare US subprime lending to the aussie FHOG.

The biggest in my mind is this:

SUBPRIME
is an entire loan product that enables a person(s) with poor credit rating and total lack of serviceability, the chance to get a loan to buy a house. These loans *typically* had a honeymoon period of super low IRs, that reverted to ABOVE normal IRs after 3 years or so (eg. 2% IR for 3 years, then revert to 8% IR). The products were also typically non-recourse loans, and thus allowed the borrower to just walk away if things went belly up, with no responsibilty for outstanding debt.

FHOG:
Essentially this is a government sponsored "deposit" for a house. The buyer still has to meet normal strict bank lending criteria, with a good credit history and meet the banks servicability models. Loans are identical to a normal house mortgage. All the buyer receives is a "deposit" which they dont have to save, enabling them to enter the market sooner.


In short.... subprime borrowers were people who should not have been given loans the size they were given. They are dodgy lending products. VERY dodgy IMO.
FHOG is just a helping hand deposit for a buyer to help them buy a house. They still have to apply for a loan under normal regulated bank lending criteria.

As for lo-doc... not applicable IMO. Lo-doc loans usually require <80% LVRs.... thus you would need a large deposit, which a bad credit borrower would not have.

Perhaps it's time for you all to forget subprime for a second and realise that it is bigger than that.

(By the way, we may not have as much 'subprime' as the US, but we also don't have any prime)

Thank-you for everyones replies.

I must agree with the last poster, sub prime, FHBG are small compared to the overall picture that I am know seeing.

Hi, he's about as incapacitated as I am.

But people, focus on the number I was trying to show. Their rent is $16000 p.a. [Mine - single person household is $18000 btw]

Their brand new 4 BR home to be will only cost $14500 in interest.

Don't forget they get $25000 FHOG + other rebates such as stamp duty concessions, I think.

And notice before? Interest rate goes up, house prices generally are high [high inflation era]

Same old story, employed or not, sound or unsound, blind or deaf, we still need to live in a house.

KY

But what happens if husband loses his job? You never know..

kum yin lau said:

Hi, he's about as incapacitated as I am.

But people, focus on the number I was trying to show. Their rent is $16000 p.a. [Mine - single person household is $18000 btw]

Their brand new 4 BR home to be will only cost $14500 in interest.

Don't forget they get $25000 FHOG + other rebates such as stamp duty concessions, I think.

And notice before? Interest rate goes up, house prices generally are high [high inflation era]

Same old story, employed or not, sound or unsound, blind or deaf, we still need to live in a house.

KY

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Hi, husband doesn't work. Been on Work Cover & then took a settlement of $70K. Doesn't work & probably can't get anyone to employ him.

See? Still live in a house & still costs them rental originally $195 pw then more and now above $300 pw.

KY

kum yin lau said:

Hi, husband doesn't work. Been on Work Cover & then took a settlement of $70K. Doesn't work & probably can't get anyone to employ him.

See? Still live in a house & still costs them rental originally $195 pw then more and now above $300 pw.

KY

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1. It makes a bit sense now to me.

2. Consider these FHBs are not investors -- they do not need to realise the capital fall or gain. It does not matter to them as long as the out of pocket money (difference between rent and payment).

3. the benefit of owning their brand new home would be way higher than the small out of pocket moeny - remember - government gave them 25k extra to pay - maybe enough for few years + 70k - it may last5-7 years. By that time the market should have recovered anyway.

4. They are not investors - therefore why they need to worry like us because the benefits are way better than the small out of pocket money.

5. If the economy getting worse, the rate is unlikely to rise but reduce instead -- they benefit.

6. We should think from someone who is NOT an investor but love to own their home. Some of us here have the experience being a tenant - inspections, asking for rent, no pets....

kum yin lau said:

Hi, husband doesn't work. Been on Work Cover & then took a settlement of $70K. Doesn't work & probably can't get anyone to employ him.

See? Still live in a house & still costs them rental originally $195 pw then more and now above $300 pw.

KY

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aaahh! The great Aussie success story - warms my heart;

Hubby's finally got the workcover pay-out and never has to lift another finger, and lo-and-behold...the littlle missus has got her centrelink payments to ice the cake.

They've done well.

KYL, methinks a little phone call to the Workcare office from you is in order.

Hi, I'd never dream of dobbing anyone in. Besides, they're above board. They're very clever when it comes to their rights & entitlements. And they have all the legalities covered. Wife was working at one point & had a genuine accident which shortened a few fingers.

Footnote: husband is now working & has been working for 4 weeks.
Coincidence? The moment they knew they could get a loan to buy a house, they started looking for ways to pay for it!

Keep the Aussie Dream alive. It's the only way to have people account for their housing needs.

KY

kum yin lau said:

They're currently paying about $1300 per month rent. = $15600 p.a.

Husband took a settlement from Work Cover [about $70000 cash] and wife receives Centrelink benefits.

As far as I can see, what they pay for housing if they buy their own brand new home and what they pay for renting is about the same. Only difference is if the bank requires them to pay P&I, then they might have to fork out more.

KY

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Crikey..!! I'd never thought you could get a loan for a new house under those situations!

The banks encourageing a housing boom is in their own interests I suppose. A housing bust would see them bust too. I must admit, the above situation sounds a bit sub-prime to me.

See ya's.