#mortgagestress

Canadian mortgage fraud – Laurentian Abyss(m)al

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Laid up in bed this week with the flu I watched The Hunt for Red October where Sean Connery plays a Russian sub commander with a thick Scottish accent. To rendezvous with the CIA to complete the defection they head to the deep waters of the Laurentian Abyssal, ironically the name of the Canadian bank which has seen the proverbial torpedo hit the propellor.

It seems that Laurentian Bank in Canada has been caught over mortgage fraud, the second lender to do so. Canada’s property prices have trebled since 2000, seeing but a minor blip during GFC. Zerohedge noted,

An audit “identified documentation issues and client misrepresentations” with some mortgages…Laurentian said it will repurchase about C$89 million ($70 million) of those mortgages in the first quarter, or 4.9 percent of such loans sold to the firm….It will buy back an additional C$91 million of mortgages “inadvertently” sold to the firm, also in the first quarter.

The total value of the loans made to the 3rd party was around $1.16bn. Of course the CEO of Laurentian Bank is brushing aside the scale of it.

As we know Home Capital Group, Canada’s largest mortgage lender was busted for mortgage fraud and required a $1.5bn bailout facilitated by the 321,000 Healthcare of Ontario Pension Plan (HOOPP) members. Not to worry those emergency loans are backed by the mortgages!! Naturally “safe as houses”

Perhaps in the immortal words of Red October Captain Ramius, “be careful what you shoot at in here…things inside here don’t react well to bullets

Or perhaps in the words of Canadian born Inspector Frank Drebbin, “nothing to see here!”

If everything is so great then why is our political scene so broken?

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Queensland’s state election said it all. Both the incumbent parties lost massively even though the incumbent Labor Party looks like holding on to power. While Pauline Hanson’s One Nation party looks like it fared poorly in terms of seats it still got 13.8% of the vote from 1% in 2015. Forget the headline results but think of what the political turmoil In local, state and federal levels is telling us more broadly.

Think logically about it all. If the economy is booming, jobs are abundant and prosperity is on the march then there is little need for governments to be running deep deficits let alone facing hung parliaments and acts of desperation. Surely the incumbent governments of the day can laud their own achievements and their constituents would happily keep returning the status quo. The majority should continue to be happy. More by rights should be winners in such a world of record housing prices, steady wage growth, low unemployment and 25 years of economic growth as experienced in Australia.

Yet PM Turnbull turned on many of the traditional supporters of the conservative wing of his Liberal National Party (LNP) coalition who turned their back on him to hand Labor the victory in Queensland. Not so fast Prime Minister. They didn’t leave the party. The party under your incompetent stewardship left them. At all levels the LNP is divided. There are some quarters suggesting that the Nats may split from the Coalition in the next election in Queensland to leave the stench of the Liberal Party to themselves. This is when personal ambition trumps wish to serve a nation.

While the LNP was handed the most valuable and recent lesson of the disaster that was the Rudd-Gillard-Rudd internal factional knifing during their time in power, it completely buried its judgement and started following a left leaning press, weak poll numbers and copied Labor’s folly. Now we have a hung parliament (not withstanding the dual citizenship fiasco) with chronically weak and misguided leadership. One that tells voters that they have no clue rather than introspection that the party may indeed be the problem.

It used to be said that Australia enjoyed the most stable politics in the Asia Pacific region. That encouraged foreign investment and gave Australia low interest rates, a superior credit rating and a regulatory platform that ensured trust (important for corporations), the envy of many nations. Yet inside a decade we have had 5 (soon to be 6) prime ministers which has thrown that ‘reputation’ in the toilet. In a world where international capital is more mobile than ever and asset prices are peaking, instability in government eventually carries severe financial market penalties.

For Aussie banks, levered up to the gills with inflated mortgage books on their balance sheets, such things have negative implications for the 40% reliance on global wholesale credit markets to fund themselves in the face of a tightening US interest rate cycle. Do not underestimate the negative connotations of a federal government that has lost its way, no matter which major party is in power. Where the average Aussie can’t bear anymore on the mortgage, a third admitting they can’t pay the home loan if they lose their job for 3 months or more. Almost 1,000,000 Aussie households would be in severe mortgage stress if rates moved 150bps(1.5%). Think of the spill-over effects on consumption which would only lead to a recession and lay offs, exacerbating a cycle, all the while bashing the currency making international funding even more biting. If only we had a stable government that had a decent fiscal position to weather that storm. Oh, that is right we squandered that in 2008.

One Nation in Australia, AfD in Germany, Party for Freedom in The Netherlands, Front National in France, 5 -Star Movement in Italy, Fidesz in Hungary, FPO in Austria, the Sweden Democrats, Vlaams Belang in Belgium,  Progress Party in Norway, Trump, Brexit…these patterns aren’t random. It isn’t just populism but protest votes to establishment parties that aren’t delivering. While we are constantly told how great our lot is, sadly the gap between haves and have nots is widening globally. Politicians who are ditching political correctness and making waves on publicly uncomfortable issues are thriving. Why could that be?

Donkey (informal) votes in Australia have seen numbers soar from 2.2% in the 1950s to over 5.0% in the 2016 election. Some electorates in NSW saw as high as 14% informal votes. These are powerful messages in a country that has compulsory voting, which has slid to 90.9%.

The sad reality is that the electorate is making louder noises every election that things are not pointing in the right direction yet the muppets are still being returned to their box seats on a dwindling majority. Why? Because not enough voters are heeding the warning signs that are sounding in front of them. Of course politicians still continue to sell comforting lies backed by ever more unaffordable promises to keep themselves in power for as long as possible when we all need to be facing the unpleasant truths that will happen whether we like it or not.

Indeed those deplorables who voted One Nation might have spurned the LNP but not without good reason. In time, they will be viewed as the wiser ones. Not because they necessarily believe in Pauline Hanson’s platform but because they believe in Turnbull and Shorten’s even less. It all rings like a Premier League football coach making a litany of excuses for his team’s woeful performance that ignores the fact that the collection of individuals have absolutely no cohesion as a team. All the fans can do is bury their heads in their hands until the point they can’t bear to watch another game until the coach is sacked.

Daniel Andrews’ misguided altruism

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Premier Daniel Andrews is launching a program to help first home buyers get on the property ladder in Victoria, the fourth most expensive property market in the world. The scheme, starting on July 1, is expected to benefit first home buyers save $15,535 stamp duty on a $600,000 property. Tax discounts for homes valued between $600,000 and $750,000 will be applied on a sliding scale.

There is only one reason why I think this is a flawed program. Encouraging people to climb  onto an already inflated property ladder may end up costing them way more than $15,535 in lost equity. If Premier Andrews had a better command of economics, he’d know that in Melbourne prices are around 10x income which is higher than just before the GFC at 6.5x. In Sydney housing prices are 12x income. In 2007 they were 7x income. This is simply unsustainable.

As I wrote yesterday, the extent of people who are in mortgage stress (30% or more of salary on mortgage) or ‘severe stress’ (missed a mortgage payment) is shockingly bad. Victoria has 25% of its mortgage borrowers in this position. Given first home buyers are likely to be at the lower end of the income generation spectrum, one would imagine encouraging them to buy in toward the top of a bubble seems misguided. By Digital Finance Analytics own study, if rates increased 3%, Victoria would rank 3rd worst state for stress/severe stress at 42.5%, 16% 0f which would be severe. We already have examples of property markets going wrong in Australia.

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Take the mining town of Gladstone. In the last three years housing prices have plummeted 52%. Over 10% of the property is up for sale not to reap a nice return but cut losses. It is a completely different dynamic. Average rental prices per week have dropped from $320/week to $150/week as mining activity leaves high vacancy rates. Real estate agents there have been talking up the market saying panic wouldn’t ensue if landlords weren’t flicking the chicken switch. Talk about defending a lost cause.

Or should we just thank Daniel Andrews for picking the top of the property market in Victoria? Perhaps letting natural market forces come to play will mean first home buyers who save up, be patient and wait to enter at more affordable prices after a sizable correction may will be only too happy to pay stamp duty on a substantially discounted house.