Low Doc Loans still being Marketed in Australia

I did some more research on and Low Docs Loans available in Australia today. I was conceredn by what I found, when you consider the world may go into a Depression due to the sub prime loans in the USA.

These loans are still available to anyone who “qualifies”. I thought there was a credit crisis where no one was lending to anyone without proper credit checks. That is not the case.

It’s not just the Non-Bank lenders that offer these types of loans. The Big 4 offer the  Low Doc Loans too. Go to the Info Choice Web site to compare rates.

Whilst the government is propping up the non-bank lenders by buying their mortgages, nothing seems to have been done to tighten the lending practices.

These loans are aimed at casual workers, self-employed people and commission sale people. I am not against casual workers or commission sales people getting a housing loan. There have been people in these types of work for years and somehow they got housing loans. They got them mostly by showing a good savings record and consistent employment track record.

Right now I would caution anyone from taking out any kind of home loan in the middle of this financial crisis. This applies whether they have a large deposit and qualify for a standard home loan or have to apply for a Low Doc Loan.

It is none of my business if people want to take out Low Doc loans as long as their decisions do not affect me. According to an article in the Sunday Telegraph almost 7% of loans taken out now are Low Doc loans. What’s more up to 10% of these Low Doc Loans can be included in the Residential Mortgage Backed Securities the tax payers are buying off the non-bank lenders.

I have tried to find out how the government will vet the mortgages in the RMBS’s to ensure the rules are followed, but so far I have not been able to find any information about this.

In times like these with recession looming, our government offering $21K to first home buyers and commission salespeople earning higher commission selling Low Doc loans I think a good proportion of the loans sold will be Low Doc Loans.

There appears to be a conspiracy to encourage our young people to take on a $250K debt when we should be advising them to save and not take on a large debt right now.

What is a Low Doc Loan? This explanation on a web site says it all. Most web sites offering Low Doc loans have similar marketing pages. I just chose one at random.

“Now you can declare the income you receive from your normal job without having to answer lots of difficult questions! You don’t need to provide payslips or commission invoices, a one page income declaration is enough to keep our lenders credit departments happy.”

However they do make the point that people who intend lying about their income should not apply.

How they justify Low Doc Loans

I read this off a Low Doc Loans web site today. It’s for casual workers.

“Casual employees can often work as much as they want to work. Before they apply for a home loan they don’t need to work that often, so their payslips show a low income. Of course when they have their loan they just accept more shifts so that they can keep up with the repayments.

This is a perfectly legitimate and common situation, yet the major banks don’t recognise future earnings so you can’t get a full doc loan. This type of situation is acceptable to one of our low doc lenders.”

There are several problems with these statements.

  • Does the casual employee wake up one morning and decide they want a home loan?
  • How come it is a given that they can often work as much as they want to? Let’s see how much casual work is available in the next few months.
  • Isn’t it against the law not to have pay slips and don’t you have to declare all your income?
  • Why wouldn’t they be doing more shifts to SAVE for a deposit way before they applied for a home loan?
  • Why is it perfectly legitimate to not declare all your casual income?
  • Why is it the common situation that casual income is not declared?
  • Shouldn’t people show some track record of savings and living within their means before getting a loan of several hundred thousand dollars?

This one is for Commission Income;

“Anyone in sales can tell you that if they need to earn more money they can just work longer hours or talk to more customers. So more often than not the income shown on a salesperson’s weekly payslip doesn’t show their true ability to repay a loan.

Did you know that to get a full doc loan most lenders use your last two years tax returns and average the commission received? If you haven’t been in your job for two years they just can’t help! This inflexible approach by lenders has resulted in the commission income low doc, enabling salespeople to get home loans without the paperwork.”

There are several problems with this statement.

  • It is not always easy to increase sales by talking to more customers. Try doing that right now. The numbers game does not always work.
  • At this time it’s not about ability to sell so much as the economy gone bad. If the economy is down and sales are down then their income is down. That should be telling the person it is not a good time to take out a $300K mortgage.
  • The last two years tax returns and average commissions will most likely have been good. However the uncertain outlook should make people cautious.
  • If they have not been in that job for two years, what about their previous job?
  • It is not inflexible to insist on proof of income over a period of time. It’s just good business sense for the lender.

Another one, this time for Cash in the Hand Income

‘Waiters, tutors, valets, bricklayers and many other professions are typically paid without their employer ever issuing payslips. This is no problem until of course they apply for a loan! With no payslips to show these borrowers are often left high and dry by their banks.

Because there is no need to provide payslips for a PAYG low doc the home loan can be approved quickly and without hassles.”

  • Why do these people not get a pay slip? They should insist on one.
  • If they intend applying for a home loan wouldn’t they want to prove they can manage the loan by showing their income statements?

It seems to me the government, banks and non-banks are pushing low docs loans which tend to go to people who’s employment will be most affected by an economic down-turn.

I am told that the Low Doc loans must not be more than 10% of the securitized mortgages the taxpayers will buy off the banks. Who’s checking?

In addition to the lower compliance requirements if the commission sales people get higher commissions on Low Doc Loans rather than the standard loans, which ones are they going to try to sell? I read the commission can be 60% higher.

Two articles in the Australian papers add to the concerns.

The first is from the Sydney Morning Herald called, “Feeling Stressed? Don’t worry, the banks are here to help“. They pretended to be a potential home loan client with no savings and a $5K credit card debt and were able to get verbal approval from more than six banks for $250K.

The other was in the Sunday Telegraph today called, “Low Doc Lenders slug Borrowers”. This article is about the high interest rates being charged by non-bank lenders to Low Doc Loan clients right now.

I suspect like the sub prime mess financial commentators will fill their weekend column commitment with an article on this potentially major problem and move on to something else next weekend. I’d still like to see them really challenge the government on this and check it out thoroughly. If it all checks out that will be the end of it.

If it doesn’t and the housing market does crash many new young home owners may well be financially devastated. Does anyone really care enough to take a stand. These young people could be your sons and daughters.

The government has given $8Bn to buy supposedly ‘AAA’ rated mortgages and hold them until maturity or until they can sell them. That could be 30 years. If the housing market falls like it has in the US and UK then tax payers could lose 20-40% of that $8Bn as people default on their mortgages.

When you consider the government has committed an additional $10.4Bn to supporting our whole economy during this financial crisis you have to be concerned.

How will this affect Baby Boomers? I think it is almost a forgone conclusion now that our Retirement Nest Eggs will be taxed for the good of the country and to help pay for all this spending.

If it is your child that ends up with a bad mortgage and a house they cannot afford, will you crack your nest egg to help them out? If you do you will be working till you drop.

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