Australian Treasurer Peter Costello urged the nation's states to toughen regulation of non-bank firms that make loans to people with poor credit histories, as global lending dries up amid the US subprime mortgage crisis.
The states must "enact uniform law" to regulate mortgage originators who offer so-called low-documentation loans, or hand the regulatory power to the federal government, Costello said.
"The states need to be looking more carefully at this to make sure that the situation is well and truly under control," said Craig James, chief equities economist at Commonwealth Bank of Australia Ltd. "It's certainly very important that we stave off any sort of similar US problems happening in our economy."
Concerns about the lending standards of Australia's non-bank institutions increased as fallout from the US subprime market triggered a global credit crunch. Sydney-based Rams Home Loans Group Ltd last week failed to refinance A$6.17 billion (US$4.8 billion) of US short-term debt, loans it relies on for more than 40 percent of its funding. Its shares plunged 36 percent on the Australian Stock Exchange on Thursday on the news.
Rams offers low-documentation loans and mortgages for 100 percent of the purchase price of a home under the slogan "No deposit? No worries!" Lenders such as Rams are likely to pay more to fund mortgages they offer as a short-term funding freeze that started with the US subprime slump spreads to Australia.
"I am very concerned that some of these low-documentation lenders may be pushing money onto people who they know are bad risks and I want to see that ended," Costello told the Ten Network's Meet the Press program yesterday. "We would be willing to step in and take their powers and legislate in this area."
Ralph Norris, chief executive officer of Commonwealth Bank of Australia Ltd, the nation's second-biggest lender, said the rising cost of funding may be passed on to customers.
"The cost for us to provide loans went up 25 basis points in the past week and there is always an issue around being able to balance the depositors situation on one side and the borrowers," Norris told the Sky News Sunday Business program yesterday.
A basis point is 0.01 of a percentage point.
Costello said commercial banks shouldn't use the US subprime fallout as a reason to increase their interest rates.
"There is no need for any bank in the wake of what is happening in the US to move its interest rates up," he said.
Australia's housing market, where affordability has sunk to a record low, is healthier than its US equivalent because prices are still rising, Costello said.
"If you have them falling, you've got a US situation on your hands," he said.
Lending to people with poor credit makes up about 1 percent or 2 percent of Australian mortgages, compared with 15 percent in the US, said Shane Oliver who helps manage US$83 billion at AMP Capital Investors in Sydney.
Still, "the concern is warranted," he said.
Australian banks have "minimal" investment in subprime US loans, Standard & Poor's said in a statement on Aug. 6.
The US housing market is mired in the worst slump since 1991 as banks and brokerages see loan demand dry up, securities backed by mortgages decline in value, and investors avoid buying debt to finance takeovers.