Wednesday, April 09, 2008

How much is being lost? As much as Australia earns in a year.

And mortage brokers are part of the problem, not the solution.

The potential losses from the US financial crisis may be approaching the entire GDP of Australia.

In its latest Global Financial Stability Report released this morning the International Monetary Fund said that the direct losses to financial institutions from bad mortgages in the United States may now amount to US$565 billion, and that when indirect real estate and other losses are taken into account the total may be US$945 billion (A$1,018) about the same as Australia's annual GDP.

It said there was a danger that the indirect losses facing non-bank institutions might “reverberate back” to the banks, widening their losses further...

New financial instruments had increased the potential for adverse “liquidity spirals” in which a funds shortage in one sector leads to a funds shortage in another and then back again.

Needing urgent revision were executive pay schemes that rewarded short-term performance rather than risk management.

Ratings agencies were also to blame for failing to understand that so-called structured credit products should be rated differently to standard loans. he IMF had recommended a different rating system for structured credit products as far back as 2006.

The report a tighter oversight of mortgage originators which it said should retain a stake in the mortgages they originate.

Its concerns echo those of Australia's Reserve Bank which on Friday described the the practice of banks lending through mortgage brokers as “dangerous”.

Giving evidence to the House of Representatives Economcis Committtee the Bank's Deputy Governor Ric Battellino said it was “quite dangerous that lenders have started using agents to market loans”.

“There is no doubt that the agent does not have the same incentives to maintain high standards as the bank itself,” he said.

“I think it is very important for banks to maintain a direct relationship with their clients and not to use agents.”

The Bank's Assistant Governor in charge of Financial Markets Guy Debelle said that the sooner the Commonwealth took over the regulation of mortgage brokers from the states the better. Brokers had given borrowers “poor advice”.

Australian banking stocks fell sharply yesterday on concerns about credit-related losses, with Commonwealth falling 2 per cent to $43.17, the ANZ down a further 1.5 per cent to $21.67 and Westpac down 2.4 per cent at $23.55.

The National Australia Bank business survey released yesterday showed confidence falling to a six year low.