Vital Signs: the spooky mortgage risk signs our bankers are ignoring
Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.
This week: the big banks front a parliamentary review but remain blinkered on the risks of the many interest-only loans they’ve funded.
I’m not normally a fan of parliament hauling private sector executives before them and asking thorny questions. But when the Australian House of Representatives did so this week with the big banks it was both useful and instructive.
And, to be perfectly frank, terrifying.
Let’s start with Westpac CEO Brian Hartzer. First, he confirmed the little-known but startling fact that half of his A$400 billion home loan book consists of interest-only mortgages.
Yep, half. Of A$400 billion. At one bank. Oh, and ANZ, CBA and NAB are all nearly at 40% interest-only.
Hartzer went on to make the banal statement: “we don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so.”
So did it make sense for all those American mortgage lenders to lend to people on adjustable rates, teaser rates, low-doc loans, no-doc loans etc. before the global financial crisis?
Of course not. The point is that banks are not some benevolent, unitary actor taking care of their own money. There are top managers like Harzter acting on behalf of shareholders. Those top managers delegate authority to lower-level managers, who are given incentives to write lots of mortgages. And, as we know, the incentives of those who make the loans are not necessarily aligned with those of the shareholders. Those folks may well want to make loans to people who can’t pay them back as long as they get a big payday in the short term.
ANZ CEO Shayne Elliot repeated Hartzer’s mantra, saying: “It’s not in our interest to lend money to people who can’t afford to repay.” Recall, this is the man who on ABC’s Four Corners said that home loans weren’t risky because they were all uncorrelated risks (the chances that one loan defaults does not affect the chances of others defaulting). That is a comment that is either staggeringly stupid or completely disingenuous....MORE