Lessons to Learn From Mortgage Lending in Australia

Maybe only a friendly foreigner could say this. But America needs to realize that not everyone can own a home. The American Dream of home ownership for all is a fraud. Politicians who pimped this dream created an unsustainable mortgage industry whose collapse is only surprising because it didn't happen earlier. America's mortgage industry will not recover, nor deserve to recover, unless it is prepared to challenge this politically unpalatable reality.

Now, Australians -- and others -- place a high value on homeownership too. But they are aghast at the dumb things America has tolerated in pursuit of that goal. Even more dumbfounding is that nobody in Washington seems to be talking about fixing it.

~Editorial in yesterday's WSJ by Australian journalist

The editorial points out some significant differences between mortgage lending in the U.S. and Australia - the U.S. has nonrecourse, 30-year fixed rate mortgage loans, typically without prepayment penalties, and we also passed the CRA, and all of these uniquely American features of mortgage lending serve to "stack the cards against lenders and in favor of risky homeownership." And it's safe to say that all or most of these pro-borrower, anti-lender mortgage policies in the U.S. are government-mandated.

In contrast, mortgage loans in Australia are recourse, so "When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn't cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It's a neat way of reminding Australians to borrow responsibly."

Australian mortgages have either variable rates of interest, or fixed rates for periods of a maximum of five years, and they face a prepayment penalty when refinancing a mortgage to compensate the lender for the "lost interest the loan would have brought in had it been carried to term."

Bottom Line: One part of fixing our credit crisis is to consider reversing the pro-borrower, anti-lender mortgage policies in the U.S. Moving towards the Australian system would go a long way towards solving our mortgage troubles, and would stabilize our credit market and banking system and make them less vulnerable to credit shocks in the future.

Comments

[Paul Killinger:]

Mark,

I must be missing something in the comments from this Aussie chap. U.S. mortgage instruments are CERTAINLY recourse debt, as are ALL other types of domestic consumer lending.

Now if he meant to say that our mortage credit standards were too lax, or that lenders didn't pay close enough attention to delinquencies and chargeoffs on consumer credit reports, I can understand that.

But to suggest that any of this was somehow NON-RECOURSE debt is simply factually incorrect. Besides, he should be worrying more about his own country's fiscal condition, which is PLENTY challenging, rather than misstating ours.

2008 Oct 07 09:10 AM

[RSAAKS:]

Did I read it correctly, that in Aussie, if I pay off a loan before it is due, I still owe something extra to the lender because he did not earn interest? Not only that, the lender could raise the rate often, but the borrower cannot get out and get a cheaper loan elsewhere without penalty??? Yes, we need such banking here!! We need to protect banks, who cares for consumer!!

2008 Oct 07 09:13 AM

[CLH:]

Personal responsibility doesnt exist in America. If you sign a contract and dont follow it through you are heroes in America and the left will shower you with money.

The old English system of debters prison had its good points.

2008 Oct 07 09:31 AM

[Paul Killinger:]

Mark,

The WSJ is the second NY-based publication I stopped reading, after the NY Times. The IBD is still pretty good, though. As are the Daily News and the Post, albeit for different reasons. I tired of the politically inspired diatribe in the former two, but I really miss the classic American journalism contained in the latter.

2008 Oct 07 09:49 AM

[Timbo:]

What will he say when the massive Australian housing bubble bursts?

2008 Oct 07 10:52 AM

[goganidse:]

Timbo, well done. That is the real question!

2008 Oct 07 01:28 PM

[pokeyhare:]

Consumer irresponsibility and fraud are the elephant in the room. It's an election year. They vote. The institutional problem of inadequate capital in present circumstances could be substantially relieved by eliminating the mark to market rule for portfolio loans. Mark to market this coming December will severely exaberate and continue the capital and lending crisis unnecessarily.

2008 Oct 07 07:00 PM

[Mim:]

No, that isn't correct. You only pay high penalty fees if you exit out of a fixed rate. Compounding interest is illegal here (or so I thought) - you only pay interest on the balance of the principal.

2008 Oct 28 05:26 AM