Should lending criteria be tightened?

johenmo · 9 October 2008

Couldn't find a thread about this. This can be split into business vs. personal. But with debt/credit being an integral part of the currrent problems, is a tightening of lending criteria (part of) the answer?

I recall trying for home loan #1 20+ yrs ago - must have 20% deposit, etc etc. Until recently, it seemed the criteria was a job (of some sort) and breathing - and you wondered if both or either were optional! LOL.

Whilst "blame" can be laid at those who take up the debt, surely some has to be laid at the lending institutions?

Be interested in the various views. I'd put a poll in but can't work out how to do it.

nioka · 9 October 2008

The availability of credit cards seem to be one of the biggest problems. Seems like you can get any number of cards with excessive credit made available to people with no hope of keeping up payments.

In my young days you needed 33% to buy a new car and 40% to buy a second hand one. That was a government regulation. You needed a good income and a good record with your bank to get a home loan plus a reasonable deposit. Credit cards hadn't even been thought about.

Yes, credit lending criteria should be tightened. However if it happened today it could prolong the problem, better to do it when times are good. It would be better to restrict credit than increase interest rates when the reserve wanted to slow the economy.

johenmo · 9 October 2008

So nioka, do you see it going back towards that - having to have a better track record b4 lending? Or will it cycle around by tightening and then relaxing as time goes by and the memories of the credit crisis of 2008(+) are a bit fuzzy?

I can see that having to "prove" yourself will assist in learning to "save". Probably knock a few of the cowboys out of the saddles.

As for credit cards, I get something every month for a new one or to increase the limit. My spouse hasn't worked in Australia since 1986 and she got an application sent to her a couple of weeks back.

I hate debt with a vengence for lifestyle items but will use it to help build wealth.

nioka · 9 October 2008

johenmo said:
So nioka, do you see it going back towards that - having to have a better track record b4 lending? Or will it cycle around by tightening and then relaxing as time goes by and the memories of the credit crisis of 2008(+) are a bit fuzzy?

Both.The generation that learn a lesson now will have to remind another generation of the same problem. There was a saying "3 generations from rags to riches then another 3 back to rags" or " One generation earns it, leaves it to the second who gives it to the third to waste."

awg · 9 October 2008

would be fascinating if any mortgage brokers, or loan approval staff answer these forums.

I would not be surprised if it became almost impossible to get a loan without 20% deposit.

Who would want to give the mortgage insurance required?

Quite possible 20% property price falls may occur in many areas, so lending institutions will want to be protected.

As for credit cards, absolute madness.

I always pay mine of interest free.

Young people dont usually do that, they have never been thru anything like this, and dont realize the negative implications of bankrupcy.

In a previous occupation, I saw many young people who had run up very large debts on CC...I always advised them to try and get parents to bail them out, and negotiate with the institution.

However, if they were dirt poor, with no capacity to repay, I just said go bankrupt ( and make sure all your other debts are paid via CC first, if necessary).

This will happen in huge numbers

Julia · 9 October 2008

awg said:
w
However, if they were dirt poor, with no capacity to repay, I just said go bankrupt ( and make sure all your other debts are paid via CC first, if necessary).

This will happen in huge numbers

And this seems to me pretty tough on creditors.

gfresh · 9 October 2008

I think larger deposits are a good idea.. however it does punish those taking out new credit, for attempting to purchase assets based on "old credit" money. The price adjust is the painful part, as we're seeing.

Not to get too much into the housing thing in here, but 20% of $450k median price is $90k, or entry level $300k prop = $60k. For most it would seem, the prospect of *saving* that amount seems nigh impossible. The maths is simple obviously, but to lay it out:

$90k = $346 every week for 5 years
$60k = $230 every week for 5 years

Re: credit cards. They should consider banning credit cards altogether, if not put the rates to 30-40%, so that the pain of taking out large amounts of easy credit is truly nasty. There is no need for them in a working system. Even a personal loan is at least a commitment, a thought process: "do I need this? am I prepared to pay this off @ $x for x years?)

Mofra · 9 October 2008

awg said:
would be fascinating if any mortgage brokers, or loan approval staff answer these forums.

Former, anyway

I'm much more worried about unsecured lending - anything over 80% (generally) requires LMI for mortgages, and the criteria (in Australia at least) is pretty stringent by world standards - not brilliant, but better than most.

To get a credit card, you need a pulse and the ability to sign your own name. Ditto the insideous "by now, pay later" schemes which are in no way conscionable given their target market & the backdating of interest to the purchase date for the full amount of purchase.

If you've ever seen delinquency mortgage cases, it's the unsercured lending that really tips families over the edge.

Happy · 9 October 2008

gfresh said:
Not to get too much into the housing thing in here, but 20% of $450k median price is $90k, or entry level $300k prop = $60k. For most it would seem, the prospect of *saving* that amount seems nigh impossible. The maths is simple obviously, but to lay it out:

$90k = $346 every week for 5 years
$60k = $230 every week for 5 years

While back it was normal to have second job to be able to speed up deposit saved in special account for that purpose.

Currently houses jumped out to about 7 annual incomes from historical 5, but if it comes back to 5, making entry level housing $215k it is still some saving commitment to save 20%

According to your formulae: $43k = $165 every week for 5 years

johenmo · 9 October 2008

A good quote re housing:

"each generation wants to start where their parents left off".

As I posted in a diff thread - make your lifestyle match your income. If you don't like your lifestyle, then do something about your income. That's why I have (finally) decided to learn about shares and trading. Then I can borrow big time and become rich beyond all measure!!!! Or go broke trying..........

But yeah... the easy "buy now pay later" has all but killed lay-by (spelling??) which was a form of saving towards something. I'm gen 1, spouse is gen 2 - that makes my kids a hybrid of gen 2 and 3.

Some people need to be saved from themselves.

nioka · 9 October 2008

Happy said:
While back it was normal to have second job to be able to speed up deposit saved in special account for that purpose.

Currently houses jumped out to about 7 annual incomes from historical 5, but if it comes back to 5, making entry level housing $215k it is still some saving commitment to save 20%

According to your formulae: $43k = $165 every week for 5 years

Less than a lot of young ones are paying to have the latest car. I got the start of my first house by selling the car and doing without one for a year. Then I had enough for a deposit on a block of land. They can do it if they try.

awg · 9 October 2008

Julia said:
And this seems to me pretty tough on creditors.

Yes I agree to some extent, which is one reason why i first advised them to make every effort to negotiate repayments.

I clearly remember a young girl who was unemployed and had $70k on credit cards. ( I advised bankruptcy)

In my opinion, the laxity of the lending orgs was at least the equal of her stupidity..as I recall, she had not committed fraud.

I was always amazed at the number of plasma TVs/Sound systems/good cars, in the houses of unemployed and Disability pensioners, and while i can certainly understand that they have time on their hands to watch etc, I personally lived a more frugal lifestyle and tried to invest in income producing assets.

I am aware that at Harvey Norman, as recently as 12 months ago, you could get one of those 3 year interest free loan deals if you were unemployed!! dont know if u still can

To another point, cause i still cant multiquote...what organisation will offer DEFAULT INSURANCE for the under 20% home loan depositors in the current climate?

would you!!...i sure as hell would not...say AIG

white_crane · 9 October 2008

Assuming that you have saved $43k and that you can now put the $165 per week into a loan, at an interest rate of 8.84% over 25 years and assuming that rates remain steady, you could borrow....

$80k
(according to one of those quick online calculators)

That's enough buy you a 3 bedroom home in the back of beyond...

I spend a little and save a lot, but I still can't buy a house.

As to the original topic, I do agree that lending criteria should be tightened. However, I think that people need to start taking responsibility for their own actions. If you overcommit and can't pay, it's your own fault.

lukentel · 10 October 2008

Hi Awg

I'm a mb... my rough thoughts...

probably for many its a question of defining criteria

In the last year (?) you've seen no doc loans eliminated, non bank lenders collapse or cant get funding (i.e. macquarie, bluestone, rams, various equity release/seniors equity loans)

Criteria re low doc lending has tightened up re the abn and gst registration requirements

Some banks still out there still will lend you 100% of the purchase price with no mortgage insurance -albeit at a higher rate

With the mortgage insurers many have reduced what they call their cash out policies or their maximum which they'd refinance on

But I do think that the current environment is cutting a lot of your yukkier/dodgier borrowers out which is something that needs to occur

Should lending criteria be tightened?

johenmo

nioka

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awg

Julia

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Should lending criteria be tightened?

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