Dumping mortgage brokers will only make the credit squeeze worse

Cutting mortgage brokers out the picture entirely will only make the credit squeeze tighter.

The mortgage application process has become much more demanding in the wake of the royal commission.

One of the main reasons our big banks became the subject of a royal commission was that some of them developed a culture of not facing the truth and making misleading statements.

Unfortunately, even after all those hearings, some of the big banks have not learned and their CEOs are still misleading the community. The consequences of last week’s misleading statements could be severe, to both bank shareholders and the community.

In the royal commission, banks were caught concealing shocking mistreatment of customers.

This time around, some banks are trying to say that there is no credit squeeze and that the fall in house prices is caused by a change of the attitude of buyers. My term for such statements is “humbug”.

At best, they are half-truths, and at worst, grossly misleading. But even the reserve bank was last year sucked into peddling a similar line.

It’s true that, unlike the credit squeezes of the 1960s and 1970s, the banks have abundant money to lend. So in historic terms, there is no credit squeeze. But the fact is that 2018 saw a vicious credit squeeze. The banks, albeit at the demand of the regulators, drastically changed their lending rules, making it very hard to get interest-only loans which previously had been handed out like lollies. Banks began looking at borrowers’ expenses and incomes in an entirely different and intrusive way, reducing the amount they would lend. They also reneged on verbal promises made to Chinese investors.

So, whereas early in 2018 and in the years before, we had money freely available to boost house prices, things became much more restricted during the latter part of 2018.

The new lending rules meant many buyers could no longer afford to pay the amounts for dwellings that they would have been able to pay during the boom. Accordingly, the new lending rules first slashed the price of dwellings. But then the fall in prices reduced discretionary retail spending. In some areas, orders for new dwellings have been slashed. And a result of the credit squeeze, the reserve bank is considering lowering interest rates, whereas previously it had planned to raise them.

The royal commission moved to increase the power of regulators to enshrine the mechanisms that caused the credit squeeze. In a nutshell, that’s what happened, and we want our banks to stop misleading us and open up a truthful community discussion on what is actually taking place.

Because some banks are staying with their old ways and still misleading the community, there is a danger that the current situation could become a lot worse.

During the boom, the big banks substantially increased their home lending by encouraging the development of brokers. With some banks, the broker share of home loans was in the vicinity of 40 to 50 per cent. This enabled banks to either substantially reduce the numbers of staff signing up home loan customers or to avoid increasing the number of staff required to process the boom numbers. They outsourced huge chunks of their distribution system. Once the new lending rules were introduced, applying for a loan became more complex. So, if anything, brokers are becoming more important, because banks don’t have the staff and applying online is a lot more difficult.

If, as a result of the royal commission, the parliament introduces broker commission rules that make mortgage broking uneconomic, then the majority of big banks do not have sufficient staff or the necessary expertise to directly process customers. So we will intensify the credit squeeze because processing of loan applications will be delayed. It’s true that because the brokers had the banks over a barrel, they went too hard on pushing up fees. But the royal commission plan looks like a dangerous over-reaction, particularly if it is carried out quickly.

One of the groups most likely to compete with the big banks, industry fund-owned ME Bank, distributes some 70 per cent of its loans via mortgage brokers. It will be devastated if its distribution system is made uneconomic. .

Bill Shorten is accusing the Coalition of being soft on its “its mates” the banks. ME Bank is pleading with the politicians to go slow in this area and it is right. If Shorten takes a tough line on mortgage brokers, then treasurer Josh Frydenberg will be under huge political pressure to cave in, rather than being accused as being “pro bank”. Had the banks been honest with everyone, first about the credit squeeze, and then about what has happened to their loan distribution systems, it might have been possible for parliament to make rational decisions.

There is no doubt the brokers were over-rewarded once the banks became more and more dependent on them. But the royal commission’s recommendation of making borrowers pay for brokers at the time of a credit squeeze is incredibly dangerous. Any consequent intensification in the credit squeeze will see the price of dwellings slump much further and the economic side effects deepen.

It is an area where the ALP and the Government need to agree not to make urgent action a political issue. But I fear my pleas will fall in deaf ears.