The future of home ownership. New AHURI research

Transcription

1 The future of home ownership New AHURI research Thursday 10 May 2012

2 Mortgage default in Australia: nature, causes and social and economic impacts Professor Tony Dalton AHURI Research Centre RMIT University More information on this research: ahuri.edu.au/publications/p30529

3 Introduction Context for the research Claims of possession Rise in mortgage defaults Increase in mortgage stress Research questions Methods Who are the defaulters? Triggers and causes Consequences of mortgage delinquency Policy directions

4 Claims of possession

5 Housing loans in arrears Non performing loans Loans in arrears by state

6 Mortgage stress growth Severe mortgage stress evident in three categories: Suburban mainstream: lower-to-middle income, white/blue collar jobs in metropolitan regions Disadvantaged fringe: low paid blue collar and service sector jobs Battling urban: younger households in higher density suburbs in casual vulnerable jobs

7 Research questions What are the key triggers and causes of mortgage default? What are the consequences of default for affected households? What policy interventions could reduce the incidence and negative impacts of mortgage defaults? What are the broader risks to the Australian housing system and economy posed by the current global mortgage default climate?

8 Research methods Review literature on mortgage defaults in Australia and other advanced economies Analysis of the Supreme Court records of mortgagor repossessions in NSW and Victoria Survey of defaulters through Supreme Court records Semi structured interviews with defaulters Interviews with legal and community services providers Submissions to inquiries

9 Defaulter histories Who defaults? Single person and couple without children underrepresented and couple with children overrepresented Presence of older households in age bracket noticeable Households who lose income Households with mainstream objectives: security, pride, freedom

10 Defaulter histories Housing histories of defaulters Average prices, mortgages and deposits with median LVR 0.90 Higher than average interest rate Well established purchasers More likely to borrow from mortgage originators Significant presence of brokers in establishing mortgages

11 Triggers and causes Typically more than one thing goes wrong Processes become connected and intertwined and shock finely balanced finances and relationships

12 Income loss Defaulter Anita, husband and child couple purchaser Loss of, or reduced employment income Anita loses job when she discloses that she is pregnant and husband s income fluctuates seasonally Illness, accident or disability in the household Relationship breakdown Too many other debts Debt after sale of first house met by Anita s parents Interest rates too high Underestimated cost of monthly repayments and other housing costs Brian single owner (inherited??) with new mortgage debt Transport industry worker who experiences periods of unemployment Diagnosed with chronic heart disease Difficult relationship with brother who seeks share of inheritance Debt increases during periods of unemployment Interest rate on RAMS loan is high compared to average rate Greg, wife and new child couple purchaser Valerie and husband new purchasers Andrew single purchaser (once separated) Greg moves involuntarily from secure wage work to irregularly paid subcontract work Husband s hours of work are reduced, but Valerie is developing a home based business which is helping Unemployed for twelve months and then reemployed on a lower salary Wife loses Disability Support Pension because she recovers from depression after birth of child Marriage broke down a few years ago Andrew bought out his wife s share of house and provides child support for a child Remaining debt from house purchased on vendor terms (now vacated and house returned to vendor) Andrew bought an investment property after receiving a small inheritance and used his equity in his house as security and could not meet repayments once unemployed Interest rate and repayments went up after honeymoon period Did not anticipate the increase in repayments

13 Illness, accident, disability Defaulter Jackie young single purchaser Loss of, or reduced employment income Leaves job as a warehouse labourer then gets new lower paid delivery job Illness, accident or disability in the household Diagnosed with chronic depression Relationship breakdown Too many other debts Began using credit cards and lost control Interest rates too high Increase in repayments due to interest rate increases Underestimated cost of monthly repayments and other housing costs Chrisoula, husband with dependent child couple purchasers Low paid job as a teachers aid Husband was a drug dealer who died from an overdose Chrisoula thought that homeownership would help make her husband more responsible Husband ran up large credit card debt Tony young single purchaser Suspended from job as a factory process worker and then loses job Industrial accident results in Tony being disabled that makes it difficult for him to find new job Increased personal debt before accident and increased credit card debt after unemployment Sonia, husband and child couple purchasers Husband unemployed previously resulting in first refinancing Sonia s breast cancer leads to job loss then part time work and husband loses work to care for Sonia. Earlier relationships Sonia not receiving child support for child, husband pays child support for another child Increased credit card debt during period of Sonia s illness Susan and partner couple purchasers Susan who was in well paying job cannot return to work and the partner is in low paid insecure work Child has disability and care responsibilities prevent Susan from working Relationship between Susan and partner breakdown following birth of disabled child Increased use of credit cards following loss of employment

14 Relationship breakdown Defaulter Trevor, wife and children - purchaser Loss of, or reduced employment income Illness, accident or disability in the household Relationship breakdown Relationship breaks down. Trevor leaves and mortgage repayments stop. Court ordered sale clears all debts. Too many other debts Interest rates too high Underestimated cost of monthly repayments and other housing costs Ginny, husband and children - purchaser Domestic violence leads to Ginny and children moving out to rental house, imprisonment of husband and repayments stopping. James, wife and infant twins - purchaser Cannot work because of injury but hoping to re-enter workforce Ill health and surgery after a work related injury results in inability to work Relationship breaks down. Wife and children leave. James pays mortgage and child support. Credit cards used to meet ongoing commitments and debt accumulates Margaret - purchaser Refinanced in order support a daughter (living independently) and children who were getting out of an abusive relationship Margaret did not recognise that payments on the new loan did not leave enough for her to live.

15 Other debts Defaulter Raman, wife and family - purchasers Loss of, or reduced employment income Retail business failed and Raman went back to driving taxis Illness, accident or disability in the household Relationship breakdown Too many other debts Business loan was secured against the house at a high interest rate Interest rates too high Underestimated cost of monthly repayments and other housing costs Colin, wife and children - purchasers Wendy almost outright owner Phillip - purchaser Kerry and husband - purchasers Strain of work associated with servicing the debt leads Colin to close business down and return to normal professional work Business fails due to poor location and poor support from the franchisor Economic downturn results in loss of income for main business Husband diagnosed with long term degenerative illness Marriage breakdown and Colin leaves the family home Marriage breakdown results in Phillip buying out his wife s share in the family home Business loan secured against the house plus other debt, all in the wife s name Wendy refinances house, lends money to son for business, which fails. Wendy s pension insufficient to cover repayments Phillip purchases a retail business through a franchise using his equity in the house as surety. The business fails. Husband borrows against the house to establish another business which fails Bank refuses loan on Wendy s pension income so refinancing done at higher rate from mortgage lender The finance for the business was organised through a finance company at high interest rate. Jenny and husband owner New mortgage on home to invest in rental property fraud results in no property and extensive debt

16 Monthly repayments Defaulter Tony, wife and two teen children - purchasers Loss of, or reduced employment income Tony and wife in continuing low income employment in community services Illness, accident or disability in the household Relationship breakdown Too many other debts Interest rates too high Underestimated cost of monthly repayments and other housing costs Committed to an over 100% loan, which absorbed most of their income

17 Missing payments responses 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Used credit cards more Borrowed from family and/or friends Earnt more income Refinanced home loan Sought financial advice Other

18 Household strategies Household strategies Pursuing hardship variation: 13% Refinancing: two thirds refinanced with many refinancing multiple times Refinancing strongly associated with debt consolidation and larger loan Early release of superannuation savings Bankruptcy tends to be avoided Increased labour market participation

19 Household strategies Cont Changes in household composition associated with default Decrease in couples with children Increase in single parent and blended families and joint households Resolving repayment difficulties Overwhelmingly sell but hang on for as long as possible Move to rental housing Other: move in with parents, children etc.

20 Proposals Lender practices Structural actors/processes topics to address Preventative measures Relief measures (restorative) Establishing a balance between conservative and irresponsible lending. Models, indicators and/or formulae for defining and assessing hardship and debt- servicing capacity of mortgagors that are commonly accepted by the financial industry, government regulating agencies, in legal forums and by financial advisers. Embedding clear and widely accepted practices of response to hardship (variations) due to both individual circumstance and wider economic impacts. Planned response by government to economic downturn, diminishing credit and increasing vulnerability of specific households to falling house prices, reduced income or higher interest rates. Regulate mortgage brokers. Stricter criteria for lending based on debt-servicing capacity, not asset value, restricting the size of loans (LVR), and aspects of eligibility relating to income. Make lenders, and their agents/brokers, more responsible for confirming debtservicing capacity of borrowers eradicating no-doc and minimising or redefining low-doc loans. Require open, plain English, and detailed information on all loan products and services perhaps through ASIC and the Understanding Money website. Improve reporting as well as regulation of non-adis and provide borrowers with lists of regulated borrowers, all demanded to be members of APRAapproved external dispute resolution organisations. Expand and enhance APRA-approved external dispute resolution (EDR) services as well as their powers to discipline lenders. Ensure repossession cannot occur while independent appeals EDR over rejected hardship claims or other serious and legitimate disputes are in process. Establish a specific home mortgage ombudsman with special powers. Regulatory agencies, such as OFT and APRA, continue reviewing products and services as well as market demand and awareness. Monitor national, state-by-state and regional developments in terms of default and house prices for timely introduction of government relief to householders.

21 Proposals Borrowers Structural actors/processes topics to address Better inform borrowers more about responsible borrowing and options to minimise the risk of default, repossession of a home and high financial losses due to problems with repayments. Improving borrowers skills and knowledge about the dangers of certain lending practices and products. Improving borrowers knowledge of and enhancing the support and relief systems available to those in financial distress. Preventative measures Improve secondary and tertiary education on financial management of home mortgages. Free, easily accessible and independent financial advice when a home loan is applied for. Redefine hardship to take more account of how severe and longstanding illness in households constrains income generation and saving and requires variations to loans. Publicise responsibilities of a mortgage and consequences of default e.g. build a narrative around a great Australian nightmare. Relief measures (restorative) Free, easily accessible, and independent financial advice if in arrears. Revise and expand eligibility for mortgage relief assistance to provide uniform national coverage, redefining hardship to take into account temporary emergency measures during downturns. Identify and publicise through the popular media those lenders taking most court actions, borrower types, and loan kinds most prone to default. Improve public credit reporting.

22 Proposals Housing context Structural actors/processes topics to address Preventative measures Relief measures (restorative) Improving collection and up-to-date analysis of data on mortgage arrears, defaults, and claims of possession (lodged and successful) as well as monitoring levels of mortgagors financial stress and forced sales. Ensuring households have a range of options for accommodation that are affordable and accessible where they need to work. Private and public tenants rights to secure long-term housing at a manageable cost. Access to temporary housing for evicted households and tenants of leased properties where the mortgagee is threatening to take, or has taken, possession. Improve terms, conditions and supply of housing accommodation options that compete with owner-occupation, e.g. enhance public and private tenants rights, expand social housing, etc. Implement guidelines and rights to temporary housing assistance for defaulters. Enhance tenants rights when the house they are leasing is subject to a claim of possession and later when it is repossessed. Appropriate reforms include sufficient notice to vacate, the claim of possession providing sufficient reason to break a lease, and compensation for costs associated with moving.

23 Conclusions Mortgage default will continue Predicting which households will default difficult Focus on Lender practices Borrower behaviour Housing policy How do households recover?

24 Conclusion

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26 Upcoming AHURI events Measuring house stress and its consequences: new AHURI research Perth, Wed 16 May 2012 New developments in housing research Darwin, Thu 7 Jun 2012 Improving housing outcomes for low-income households Hobart, Thu 14 Jun 2012 The changing structure of housing markets Sydney, Tue 19 Jun th National Housing Conference Brisbane, Tue 30 Oct Fri 2 Nov 2012