The dysfunction surrounding financial assessment of a proposed borrower is currently NOT about the borrower per say but about ‘productivity system intervention’ of the process designed to reduce staff costs for the FSP. Indeed, to achieve ‘productivity’ targets everyone is lumped into categories and ‘assessed’ by software with little ability by people to press anything other than button a or b. Quick? Yes / Simple? Yes / Accurate? No.
As a matter of fact, it’s rubbish.
For example, I had occasion to shop around for a new home loan with a major bank and was unfortunately transferred to an idiot with no capacity for rational thought [indeed 3 times with 3 banks]. The monthly expenses that they insisted we incurred were a bank construct by a team of further idiots divested from reality [See AFR Sat 17/8/2019 report damning banks incompetence]. He / they just couldn’t understand the fact that we run a company with tax implications affecting our expenses. He did not want to understand pre and post tax expenses. A simple concept for anyone with half a brain but not for this bank employee making decisions between A and B.
Dysfunctional for both the bank and the client!
To further this dysfunction it has been adjudged [same case – see comment on Caviar] that a client can actually self assess their expenses with some degree of alacrity. ASIC lost the case to Westpac because the judge said that a prospective purchaser could adjust their spending habits to suit their commitments quite easily. He virtually threw out the banks system of personal assessment. Drive a Porsche before the house purchase but drive a VW after because there is only so much money.
There is no such thing as one size fits all and no such thing as a low level bank loans assessor with enough knowledge to make informed decisions. Pushing button A or B doesn’t cut it.
They deal with a financial process over common sense. So called productivity gone rampant.
The fix? Training, training, training. Front line bank staff need to understand finance. Not just how to press button A or B.
Assessment is all about risk factors. Risks for the bank albeit now the impetus is shifting where bad advice and or bad process negatively affecting a client is also seen as a breach of fiduciary duty by the loan assessor / bank with responsibility subsumed by the bank and the application of pecuniary penalties.
However, in effect, the banks risks are low because they have assurity through say a mortgage guarantee. The problem for the banks is when the value of that guarantee slips below the outstanding loan as they would then be trading insolvent.
All the risk is on the client being able to make payments. In the beginning by good financial analysis [not the aforementioned idiot] but no one can predict future events. We all hope life is tickety boo and that we remain the person our dog thinks we are and we remain financially fluid. This is where good planning comes in. There must be a safeguard built in to protect people against short term issues. A ‘nest egg’ by any other name. The availability of money to pay loans in times of stress.
These are readily available with products such as offset accounts and interest only loans. Both allow a financial hiatus in times of stress. The trick for a lot of people is to keep the ‘de-stressing’ contingency balance without spending it.
This is where the whole financial system needs to be adjusted and thought through.
We all want our own home and the Porsche returned but banks lending 95%+ disallows this life ambition as there is no risk contingency. Really, only unemployment can cause headaches because without a contingency the Porsche is gone once again followed by the home. Not good.
In an expanding market, the banks risks are low as is the overall financial position of the borrower because asset value increases will leave a balance to start again in the event of default. Not good but not life threatening. However unemployment in a contracting market will be devastating for the opposite reasons.
Therefore it is critical to factor in say a two year contingency balance to cover expenses in the case of unemployment et alia. This is not available money to retrieve the Porsche but a controlled fund by the bank [not the idiot] to be made available with proven hardship. A de-stressing fund.
Let’s assume the idiot gets retrained and becomes human and has to assess John & Mary's home loan application. Financial alacrity is critical in understanding the expense patterns of the borrowers. Understanding, not computer driven assumptive rubbish.
John sold the Porsche, structured his finances through a holding company and had the minimum deposit [the sacrificed Porsche]. The assessor analysed past credit card statements to ascertain willingness to repay debt, analysed EBIT to ascertain capacity to repay including pre and post tax expenses, and, sought a credit rating to ascertain past issues. All keeping in mind that the client wants his house and will fight tooth and nail to make sure it’s kept in the family. In the same way we drive a car just metres from death yet we have a self preservation instinct stopping us taking risks.
The big difference we need to initiate is the contingency balance concept where the borrower and the bank are assured of financial survival over say a two year default cycle through no fault of John or Betty.
It’s simple and it’s based on an assumption that values will always increase in the long term with short term fluctuations being irrelevant.
The assessor has figured out that John & Mary pay their debts on time most of the time, have no ‘material’ credit defaults and have a steady income able to sustain a 95% mortgage with the Porsche sale as deposit.
The assessor has also calculated 2 years of expenses for John & Mary as a total figure which happens to come to 5% of the purchase price.
He then offers John & Mary a loan with an interest rate based on a REAL risk assessment [not by the idiot]. In this case they needed 90% leverage for which they received a nice lumpy cheque. However, their debt was actually 95% with the 5% reinvested by the bank as an offset only to be accessed in a proven emergency such as unemployment. All these 5% ‘s can reside in a special bank fund controlled by the bank with offsets automatically deducted for outstanding debt. In this way the client is not tempted to spend it and they receive the benefit.
This simple change almost eliminates risk for both the bank and the borrower as well as de-stressing everyone because everyone knows there is a ‘2 year nest egg’ of available money if …. !!
I urge the FSP’s to think this through by real breathing humans analysing risk, returns and the provision of a ‘forced’ safety buffer. It’s a much a psychological comfort system as a financial safety net which would allow everyone to relax just a little bit more toward that tickety boo nirvana.
John & Mary have their house, a dog who believes they are close to God, two expensive kids and John has his Porsche back. Life is good.
Security through planning.