Sunday, October 09, 2016

Tracker mortgages. How banks could be made to do their job

Our biggest banks could be forgiven for thinking they've survived the worst. Coached within an inch of their lives by crisis management teams, their chiefs batted off 12 hours of questions before the parliament's economics committee this week without too much apparent damage.

But the committee is yet to report. When it does, there's a chance it'll recommend something every bit as frightening to the banks as a royal commission. It's called a "tracker mortgage" and it would force them to work for their money rather than take it. It would give the rest of us the same rights in our dealings with banks as we have in our dealings with just about with everyone else. Who else other than banks can change the price of what we've bought after we've bought it?

Energy companies can't. They sign us up to contracts that offer a fixed percentage off a regulated price. During the term of the contract the price can change, but only in accordance with changes in the regulated price. Nor can builders, painters, dentists and all manner of other service providers. They charge what we've contracted to pay, whether they end up liking it or not.

Kevin Davis, research director at the Australian Centre for Financial Studies, points out that bank executives are paid handsomely for managing risk, but that in Australia they are able to pass most of that risk onto their customers. "A bank which is funding housing loans in a way which subsequently becomes relatively expensive can simply increase the rate it charges to existing borrowers," he writes in a submission to a Senate inquiry. "A bank which had its credit rating downgraded and faced higher funding costs could pass that onto both existing and new borrowers, rather than it impinging directly on shareholder profits".

It can't happen in the United States, Japan, Korea, Canada, or most of the countries with which we usually like to compare ourselves. There the banks contract to charge a fixed amount over an indicator rate for the term of the contract. Visitors from those countries find our completely variable rates "amazing". Davis says he is not sure why we are unusual. He says it could be because our contract evolved before the 1980s when rates were subject to a government cap. When the cap was removed "the characteristics of the mortgage contract were not reviewed".

He wants the government to prohibit loan contracts "which give lenders absolute discretion to change the interest rate on existing loans". It wouldn't mean tying mortgage rates to the Reserve Bank's cash rate. It would have to be a rate more relevant to their predictable funding costs such as the 180 day bank bill rate. Or the banks could offer fixed rates as they do already. The Greens agree, and the questions asked in this week's hearing suggest other members of parliament are warming to the idea.

It'd salvage something lasting out of what to the banks has been an exercise in PR.

In The Age and Sydney Morning Herald