The Mortgage Death Grip

According to British writer Michael Rowbotham, the word ‘mortgage’, in its medieval origins, meant ‘death pledge’ or ‘death grip’. A mortgage was used as a last resort to raise money against an existing property when someone fell on hard times. From his book, The Grip of Death:

Mortgages were regarded with great suspicion, since it was generally goldsmiths employing usury not dissimilar from modern banking methods who supplied the money, hoping at least for a large profit and possibly the chance of ending up with the property.

Doesn’t that sound like your friendly local bank? You buy a nice property against which they can create credit, and you pay them interest for the money they counterfeit out of thin air. ‘If you want to be slaves of the bankers, and pay the costs of your own slavery, then let the banks create money.’ So said Lord Josiah Stamp, former director of the Bank of England. Debt slavery is a profitable business.

A consequence of the debt-based financial system is the way it can hammer down the initial deposit sizes people — especially first home buyers — need to put together relative to the size of their loan. Hence the rise of mortgage insurers who protect lenders from borrowers with this higher risk profile.

One that operates in Australia is Genworth Mortgage Insurance [ASX:GMA]. It listed on the stock exchange this year and reported results yesterday. Does it tell us anything about the Aussie housing market?

Well, based on the results alone, I don’t see any reason for panic. Loan losses are down, attributed largely to low interest rates and stable employment. The company said its average premium is coming in lower than originally expected. That’s a positive for the economy as a whole, because it’s a sign the leverage in the housing market isn’t extreme.

The Australian Financial Review put it like this:

That was evidenced in Genworth’s results as it saw a larger proportion of mortgages with a loan-to-valuation ratio (LVR) below 80%, which kept a lid on the average premium rate. Loans with higher LVRs are deemed riskier and more profitable for insurers.

High deposits are another reason you can probably worry a little less about China’s housing market. Caixon Online reported last week that first time buyers are required to have 30% of the purchase price as a down payment. Second homes need a 60% deposit. This is hardly the stuff of wild speculation.

After all, at the peak of the US housing boom in 2007, properties were being financed 100% on credit. That meant any downturn in the housing market immediately put those buyers in negative equity.

Beijing introduced these regulations in China to tighten up the property market and cool off the speculation in coastal real estate. Bloomberg equates home prices in China to 40 years of average income. If accurate, that’s a heck of a deposit to put together for your average Chinese punter.

Now compare that to the average American punter. Already, the vested interests in the US are watering down the safeguards put in place in the wake of 2008. The US Federal Housing Finance Agency (FHFA) wants lenders to start financing more borrowers, ‘particularly first-time home buyers and those without conventional pay records, according to the Los Angeles Times.

The FHFA is also going to relax rules that protect the underwriting standards of the banks and lower down payments. Currently in the US, 80% of mortgages have some form of taxpayer guarantee, for which most need a 20% deposit.

The New York Times reported this week:

Thousands of potential borrowers struggle to amass the savings to make a down payment of that proportion, and they, therefore, fail to qualify for loans…

As part of a wider effort to increase the flow of housing credit, Mr. Watt [head of the Federal Housing Finance Authority] said last month that he wanted Fannie and Freddie to back loans with down payments as low as 3 percent of the value of the home. He called that effort a “much needed piece to the broader access to credit puzzle.”

This behaviour is exactly what the property clock we use in Cycles, Trends and Forecasts predicts. It’s history repeating. In fact, my colleague Phil Anderson says that that during more than 200 years of US history, there’s only been one major variation in the real estate cycle. And it’s the new ways bankers find to avoid the regulations put in place after each collapse to ensure ‘it will never happen again’.

Starting to sound familiar?


Callum Newman+
for The Markets and Money Australia

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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