Australia’s Jingle Mail Tsunami Will Swamp the Banks, Not the Borrowers

Australia’s Jingle Mail Tsunami Will Swamp the Banks, Not the Borrowers

You might think the prospect of Australia’s housing bubble finally popping is bad. But just wait till you hear about the jingle mail tsunami coming for our banks.

Thanks to a uniquely Australian quirk of law, I believe the banks and the bank shareholders will be the ones left holding the Old Maid as Australia’s housing bubble deflates.

This contrasts dramatically with the idea that the banks will benefit from interest rate hikes as they finally earn some decent interest.

Instead, they’ll discover a time bomb under their balance sheets, with interest rates measuring the length of the fuse.

Some borrowers and homeowners may actually benefit from the coming house price crash to the tune of hundreds of thousands of dollars!

To discover how, I need to take you back to the subprime crisis in the US. One of the common narratives back then was about the importance of jingle mail causing the crash.

The story goes that, in the US, borrowers who were underwater on their mortgage, meaning they owed more to the bank than the value of the house, could simply mail the keys to their bank and walk away from both the house and the debt.

This ‘jingle mail’ was what made the housing bubble so dangerous in the US, the theory alleged. As house prices plunged below mortgage balances, people just mailed their keys to their bankers and walked away.

This transferred the losses of crashing house prices from the homeowners to the banks and turned a housing crash into a banking crisis. (It also robbed vast amounts of mortgage-backed securities of their incomes, but that’s another story.)

Now, I recall an analysis that stated that the whole theory didn’t match the data very well. The analysis was simple.

The US is divided into recourse and non-recourse states, although it’s actually more of a sliding scale. In the non-recourse states, banks can only recover the house’s value from their borrower, and not more, so jingle mail can happen.

In the recourse states, banks can pursue the borrower for their debts beyond the value of their house, so jingle mail doesn’t save the borrower from their debt and transfer the house price losses to the bank.

If jingle mail were the key to the subprime bubble, you’d expect the housing bubble and bust to occur in the non-recourse states more so than in the recourse states. But the analysis I recall (but can’t find) discovered the opposite.

The obvious reason is that banks in non-recourse states were a lot more careful about funding housing bubbles given they were the ones on the hook for crashing prices…

That’s the background you need to know to understand what’s about to happen in Australia.

My argument to you today is that Australia is actually a clandestine non-recourse state when it comes to much of its mortgage debt. Some borrowers can perform a version of jingle mail here too.

This means that, as house prices crash, some borrowers will be able to escape the losses and hand them over to the banking system instead. In my opinion, enough to trigger a major banking crisis.

How?

Well, I have an almost-completed PhD on that particular topic. (The university pulled the plug once they realised the implications of my work, thanks to the royal commission.)

But let’s just explain the basics today.

It all centres around one particular fact. This was recently confirmed by a UBS survey that News.com.au wrote a story on:

It found that 55 per cent of respondents who had taken a mortgage with ANZ in the six months to December 2021 had made false representations on their application, investment bank UBS’ survey showed.

“We think this is particularly concerning, given ANZ’s persistent declines in mortgage market share, and the fact that 81 per cent of the 93 respondents who misrepresented their ANZ originated loan claim they were advised to do so by their banker,” said UBS analyst John Storey in the analysis.

The lynchpin of my argument today is one particular part of that quote: Australian mortgage bankers (and brokers, according to my incomplete PhD) encourage people to lie on loan application forms.

In fact, according to my analysis, the bankers and brokers just fudge the numbers for the borrower, often without the borrower even knowing about it.

Nobody knows how common the practice is, although the survey from UBS suggests it’s 80% of 55% of mortgage loans for ANZ, for example.

But I do happen to know where it could lead…

This simple act of lenders manipulating loan application forms is what turns an unknown chunk of the Australian mortgage stock from recourse to non-recourse and makes jingle mail possible here.

You see, about a decade ago, court and ombudsman decisions established a precedent that borrowers who can prove their bank or mortgage broker played an active part in manipulating their loan application can cancel their loan and keep their house.

Consider, for example, the case of Manfred Schmidt, whose loan was cut from $450,000 to $0 by the court when it was discovered his loan application had been manipulated.

While these decisions were part of court cases, they were also part of the public record. And so, we know a lot about them. The Australian reported on the phenomenon at the time:

Precedent-setting court cases have recently found that, where borrowers were given loans they could never afford, lenders must extinguish part or all of those mortgages. Nine judges before six courts have to date found in favour of homeowners affected by improper loan applications, and in almost all cases courts have ordered lenders to fully extinguish mortgages within 30 days.

But how common was it?

Thousands of struggling homeowners could walk away from their mortgages as a series of court cases helps to expose widespread improper lending practices involving some of the nation’s biggest financial institutions.

Thousands? Wow.

But what if it’s tens or hundreds of thousands in the coming crash?

Since the court cases were decided, examples have gone to ground in confidential settlements or ombudsman cases, according to consumer advocates I was in touch with for my PhD.

But you might’ve noticed something. Can borrowers keep their house and cancel their loan? This isn’t jingle mail — when the borrower loses their home but no longer owes them money, they borrowed to buy it. This is something much more drastic.

Under the Australian version of jingle mail, the bank loses both the collateral (the house) and the loan too! This is a whopping loss far greater than what US banks incurred in 2008.

Which means we’ll need far fewer cases to cause a banking crisis…

Now, consider this: As mortgage costs spike thanks to interest rate hikes, and house prices fall, the unaffordability of liar loans might finally be exposed. And many of the borrowers may be eligible for the same relief that The Australian reported on back in 2012.

This would leave the banks facing vast losses and homeowners with houses they didn’t have to repay their mortgage on…

Does anyone know a dodgy mortgage broker? I’m asking for a friend…

Until next time,

Nick Hubble Signature

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend


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