Cross collaterilisation

[argentina]

Hi. I am interested to hear from brokers on the forum. I now understand the pitfalls of cross collaterilisation, then trying the sell a property, revaluations, altering LVR etc.
Is this an issue that has become more difficult over recent times with lenders tightening up their criteria?
I re-financed in 2010 and my experience, on many levels, was less than satisfactory. Do brokers have a duty of care to explains the pros and cons of the cross collaterilisation strategy to clients? I was told by my broker in an email at the time "this is how the loan has been set-up ......"
There was no discussion of options.
Two years down the track I am now selling one of the properties. What a nightmare !

 

[travelbug]

I think it's up to you to read the contract.
I nearly got caught when I refinanced.

I wanted to reval and up all my loans. I explained that they must remain stand alone.
When the documents came they all listed all the properties. I said no that I cvould not sign them. She ASSURED me that they weren't crossed. I said "so even though the paperwork says they are I can just say it's OK you said they're not". Must have thought I was born yesterday.

I sent her away and she came back the following week with new documents. This was a broker from the bank.

 

[Peter_Tersteeg]

Many brokers simply don't know the difference or have a clue about the pitfalls of cross-collateralising. From a brokers perspective, avoiding cross-collateralisation often involves substantially more work with little additional compensation so crossing two properties is the easy way to go.

Brokers have to have various certificates, diplomas and licensing. We're required to perform a minimum amount of training every year. I have never seen a formal course provided by lenders, training organizations or professional bodies that talk about it and educate brokers. There are no courses or formal education material in strategic lending for brokers or bankers.

Add to this, many brokers have a background in banking where they are often trained to cross-collateralise (although again they don't truly understand the implications). As brokers they simply continue to do what they always did.

As part of our qualifications the diploma involves case studies. The case study question is about a complex lending scenario about multiple properties and I've seen several case studies from different training organisations. Every one of them is phrased in such a way that it suggests the broker should cross-collateralise the PPOR with the additional properties.

I'm also a certified mentor for the Mortgage and Finance Association of Australia (MFAA) which means they recognise that I can train other brokers. Only about 40% of the other brokers in this group have truly left a good impression with regards to strategic lending (and these are the ones who will train the next generation of brokers). I actually include the head trainers for the group in the 60% simply because nowhere in the course material does it mention avoiding cross-collateralisation.

The banks encourage brokers to avoid it. They want to have every bit of everyone's business. The CBA head Victorian trainer stated that their own statistics show that if you set someone up with a credit card, savings account, home loan and a line of credit they're unlikely to ever go anywhere else regardless of the banks service or rates.

A broker or banker is obligated by law to arrange finance that is "Not inappropriate". It's fairly easy to argue that if the customer says they want an offset account, then a professional package with an offset account meets this definition. It doesn't mean that they have to give great advice.

If people in lending had to give the best advice possible above all else, then you'd have bankers in Westpac saying that their standard variable rate is significantly higher than the other major lenders, and they're all offering similar discounts, so you should go talk to a broker who's able to offer you loans from all the major lenders.

I think as individuals most brokers and bankers genuinely want to do the right thing by their clients, but I have consistently appalled by the level of true understanding of the implications of what people in finance are actually doing. For most people simply buying their own home this isn't an issue, but for an investor it's critical.

 

[Rolf Latham]

Do brokers have a duty of care to explains the pros and cons of the cross collaterilisation strategy to clients?

Interesting question.....................

I had a long discussion yesterday with the "auditor" while undergoing our NCCP review.

My view is this.

While there is argument in the industry generally that Cross is good or Cross is bad,and there is no clear definition of what is good or what is bad, the duty of care from a legal POV doesnt really exist, since there is no defined standard.

If one takes an objective view, the way xcoll is used by most bankers and lenders, the benefit flows to the lender or the broker............in either higher contribution, less paperwork, or better retention.

One can argue till you are blue in the face that in the cold hard light of day AND with enough evidence to hand, in most ( but not all cases) xcoll does not present a "best practice" lending solution for the borrower.

The below comment coming from a broker of a well known finance group that should know better, after wanting to cross 8 separate properties and loans........Im not going to name names because my post isnt a rant about the broker or the company, but that even large scale organisation thats should know better, either dont, or more scary dont care .....................

• Convenient to have all in one place.
• Package % is better.
• Better for lending as you only have one bank to do valuations
• It is all in one place so you know exactly what you have.
• Properties are crossed but that does not matter as if you have a debt you have to pay it. If you have other properties you would have to sell them to pay your debt anyway.

Responses such as those show a potential negligence on behalf of the borrower, and a real lack of provision of data for the borrower to make an informed decision.

Xcoll can have it uses which are beneficial for the borrower, where the benefit outweighs the potential risk.

The same discussion went on to CRAA enquiries and how a lender / broker / borrower can quickly fry their file if care isnt taken

Finally, reading loan contracts etc isnt worth much, since the loan contract and memo of mortgage doesnt list the potential separate risks or benefits of xcoll. Your mortgage docs will only show you whats being used as security and if you are xcolled. If you dont understand what this actually means, the content of the contract is not important.

ta
rolf

 

[Terry_w]

Cross collateralising loans would have always created problems. It is not just a new thing.

There is no duty of care for a broker to explain the setting up of security properties. This is really a legal matter and could be explained to you by a lawyer if you had sought legal advice.

 

[Peter_Tersteeg]

Cross collateralising loans would have always created problems. It is not just a new thing.

There is no duty of care for a broker to explain the setting up of security properties. This is really a legal matter and could be explained to you by a lawyer if you had sought legal advice.

I agree with your point Terry that a solicitor is the one who should be giving legal advice on contracts, but to be technical, the solicitor is not likely to be qualified to give lending advice. You've also got to consider that the average solicitor probably don't have the background knowledge to appreciate the implications of cross collateralisation.

 

[Terry_w]

I agree with your point Terry that a solicitor is the one who should be giving legal advice on contracts, but to be technical, the solicitor is not likely to be qualified to give lending advice. You've also got to consider that the average solicitor probably don't have the background knowledge to appreciate the implications of cross collateralisation.

Yes PT, after I posted I was thinking the average solicitor certainly wouldn't know this area or consider the implications. They could explain the security aspect - this loan is secured by x and x and the enforcement of the security in default etc. If you asked a question such as what would happen if I sold one property they would probably just say you need to get the bank to release the security.

It is really just a common sense issue and one that new players may not be aware of.

 

[Aaron_C]

Most brokers simply don't know the difference. That is a concern but not uncommon.

 

[argentina]

Interesting question.....................

Finally, reading loan contracts etc isnt worth much, since the loan contract and memo of mortgage doesnt list the potential separate risks or benefits of xcoll. Your mortgage docs will only show you whats being used as security and if you are xcolled. If you dont understand what this actually means, the content of the contract is not important.

ta
rolf

Thanks everyone for your really informative comments. As Rolf mentioned above, I knew the IP's were cross collateralised. I just didn't realise what that meant when it came to selling a property. My situation now has turned "farcical".
Once we had a buyer for one of our properties I contacted my lender to discuss discharge process. Then I discovered about the issue with altering LVR, valuations etc. It was pretty clear to me that with the falling market etc that the LVR would need to be changed (even before valuations were done). I was concerned that we would need to go through the whole loan application process again and emailed and spoke to 3 different brokers/lender representatives about this. On each occasion I was told
"don't worry. let's wait till the valuations are in"
"no, there will not be a re-application, just a variation on the loan"
I explained that my concern was that my husband and i have now separated and we may not meet lending criteria given that he is now paying child support, separate accommodation etc. I should add here that we have no defaults and always meet our loan repayments and intend to continue with joint finances.
Despite me raising this issue with them as a possible "risk", they assured me not too worry.
Now, 2 months down the track, contracts on the property have exchanged and the sale is imminent. And now they tell me we have to go through the whole application process because we are varying LVR on our loan from 71% - 77%.
Jointly we meet the criteria, but living separately we do not. So the reality is that in order to sell our property, pay down loan and reduce debt we have to start living together again to meet the lending criteria to re-finance borrowings we already have ! This, to me, is the final straw in what has been an horrendous experience with this lender. (in 2010 they made 3 contract errors that needed to be corrected). I am really just venting here, but my husband and I are separated because he is on the autism spectrum. the psychological effects on our family of having to alter our living circumstances is major.
I understand lenders have their processes, but when I made all attempts to raise issues of concern early on and it was just fobbed off. Had they done a serviceability check before we exchanged contracts on the property we could have avoided a potential legal disaster. In my honest opinion there is a real need for the lenders/brokers to listen more to their clients as individuals NOT just as another application number to be processed. I am sure there are good ones out there.

 

[Aaron_C]

I guess your situation highlights the very reason why correct loan structuring from day 1 is so important as people's situations can change very quickly.

 

[argentina]

I guess your situation highlights the very reason why correct loan structuring from day 1 is so important as people's situations can change very quickly.

Totally agree with that

 

[MarkandTina]

While I agree overall, isnt it a benefit to the borrower that it makes it less likely that you will have to pay LMI?

 

[Aaron_C]

While I agree overall, isnt it a benefit to the borrower that it makes it less likely that you will have to pay LMI?

No that's wrong with the right structure you can avoid paying LMI and keep the loans separate, or still pay LMI but a much lower amount.

 

[Rolf Latham]

While I agree overall, isnt it a benefit to the borrower that it makes it less likely that you will have to pay LMI?

Cross makes the thing worse usually.


cross cant make equity out of nothing, so the end lvr separately structured or crossed will still be xx % lvr.

The diff is that with cross you PAY lmi on the aggregate

eg

2 loans at 90% lvr at 270 stand alone a piece prox lmi total = 7500

2 loans crossed to 90 % lvr = 540 aggregate and prox lmi = 12 200

And for no benefit to the borrower

ta
rolf

 

[Rolf Latham]

In my honest opinion there is a real need for the lenders/brokers to listen more to their clients as individuals NOT just as another application number to be processed. I am sure there are good ones out there.

Thats been my beef all the way along with the legislation.

Worst still is where BOTH the client and the broker/banker are clueless............

Deer in the Headlights stuff

ta
rolf

 

[Mick C]

While I agree overall, isnt it a benefit to the borrower that it makes it less likely that you will have to pay LMI?

Quite the opp...if you can avoid LMI using a x-cros...then you an avoid LMI doing a standard split and having separated loans....x-crossing doesn;'t mean your "property value" goes up...it's still the same value...It's just a lazy and more "convenient " way for the bank to write their contact and hold the client.

LMI is a lot more expensive for x-cross as well once you go into the LMI territory...a bit hard to explain in a forum as the post would be too long and too complex.

Advice- Avoid xcross.

Most brokers simply don't know the difference. That is a concern but not uncommon.

Bankers as well...I had a NAB laon that was approved as x-cross even though i specifically ask for it to be done as a standard alone security/application...

The NAB BDM kept "convincing" me that x-cross is fine and it's the same....LOL - pretty much told the client not to sign as NAB wouldn't issue new docs...5 days later-- TA DA!!! new docs


Regards
Michael

 

[BMan]

yeah i specified i didnt want my loans crossed and being none the wiser signed it not knowing that having both securities on it meant it was crossed.
i think i paid lmi aswell where i should of... in the past now but cost me a few grand i could of used elsewhere

 

[Terry_w]

Quite the opp...if you can avoid LMI using a x-cros...then you an avoid LMI doing a standard split and having separated loans....x-crossing doesn;'t mean your "property value" goes up...it's still the same value...It's just a lazy and more "convenient " way for the bank to write their contact and hold the client.

LMI is a lot more expensive for x-cross as well once you go into the LMI territory...a bit hard to explain in a forum as the post would be too long and too complex.

Advice- Avoid xcross.




Bankers as well...I had a NAB laon that was approved as x-cross even though i specifically ask for it to be done as a standard alone security/application...

The NAB BDM kept "convincing" me that x-cross is fine and it's the same....LOL - pretty much told the client not to sign as NAB wouldn't issue new docs...5 days later-- TA DA!!! new docs


Regards
Michael

NAB are notorious for this.

 

[euro73]

Isn't it just amazing how few people in the lending world know how to structure loans well? Particularly for investors with, or seeking to accumulate, multiple properties.

From basic mistakes like crossing, to not knowing how to use the right lenders for borrowing capacity, in the right order, to build a portfolio for their client... to not knowing how to do basic things like spread exposure between QBE or Genworth (where LMI is applicable)

I wonder how many of them can name the lenders ( and have mastered their servicing calcs) that assess existing debt with actual repayments instead of benchmark rates? Or the lenders who allow addbacks or gearing? or the lenders who take 100% rent instead of 80%.... etc.

Anyway... it's a good thing so many of the good'uns reside here daily

 

[Aaron_C]

To be fair, most in the lending world work for one lender so they only need to know one set of policies...

As for us brokers, I have to spend each and every day studying credit policies of all lenders. Little things keep changing which have big impacts on borrowers.