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Billions lent to Aussie sub-prime buyers

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  • Billions lent to Aussie sub-prime buyers

    Billions lent to Aussie sub-prime buyers

    Adele Ferguson | March 08, 2008

    AUSTRALIA'S financial institutions have lent billions of dollars to home buyers who were not subject to basic credit checks and had a history of defaults, putting them in the "sub-prime" category that continues to terrorise world financial markets.

    The revelation, contained in research conducted by Dun & Bradstreet exclusively for The Weekend Australian, will add to investor fears about Australian banks' exposure to the global turmoil caused by the collapse of the sub-prime mortgage market in the US.

    Shares in the Big Four banks, which have already lost $100billion in value since their highs last year, yesterday led the stock market sharply lower. The benchmark S&P/ASX 200 index slumped 3 per cent after concerns about the international credit crisis again stalked Wall Street.

    The value of the Australian stock market has now shrunk $400 billion - or 25 per cent - since the sub-prime problems were first revealed in mid-last year.

    National Australia Bank shares crashed more than 5 per cent after it revealed a potential $110million loss on its loans to the ailing finance group Allco.

    Although there is no question of Australia's well-funded banks getting into financial trouble, investors are concerned about their exposure to other companies struggling to repay their loans. And there are fears the credit squeeze is crimping their profit margins. Westpac yesterday joined NAB in raising its standard variable mortgage rates by 29 basis points - more than the Reserve Bank's 25-point rise this week.

    Dun & Bradstreet has also discovered that, every three months, Australia's lending institutions extend almost $1billion in so-called sub-prime loans to customers with poor credit history and whose previous defaults were not picked up in the credit-checking process.

    In the December quarter - the height of the global credit crisis - institutions approved $912million in loans to borrowers with a negative credit history that was unknown at the time of approval. It is unclear if the banks are being careless or deliberately chasing riskier customers.

    Based on an average home loan of $240,000, Dun & Bradstreet's figures in the quarter show that about 3800 of the 190,000 home loans approved in the last quarter had a poor credit history that the banks and other financial institutions did not pick up. Dun & Bradstreet estimates that nearly 20 per cent of people who have previously defaulted on a credit facility will default again.

    The findings come just months before the federal Government is to receive a report examining reform of Australia's credit reporting laws.

    JPMorgan analyst Brian Johnson said he was concerned about the state of the banks' mortgage books, adding the availability of easy credit supplied by banks on the basis of falling underwriting standards had been the source of nearly every asset-quality boom-and-bust cycle. "We believe history is about to repeat itself," he said.

    Lending to sub-prime customers has been one of the biggest contributors to the downturn in the US economy. It has led to an unprecedented volatility in global credit markets as lenders demanded higher interest rates to reflect increased risks of default.

    In the US, banks deliberately lent money to high-risk home buyers to chase profits, with such lending accounting for 15per cent of the home mortgage market at its height.

    In Australia, the exposure is believed to represent about 2 per cent of total mortgages or $10billion of the mortgages held by institutions.

    Banking analyst Brett Le Mesurier from Wilson HTM said continuing increases in interest rates would "necessarily create financial hardship for many" banks. "The impact of this on bank profits would be exacerbated by weaknesses in their lending practices," he said.

    "Shareholders can do without that, particularly at the moment."

    Dun & Bradstreet says the average length of time between the first and second default is just over 10 months, meaning that home loans granted in the December quarter to consumers with a previous default are just months from the danger zone.

    The strength of the analysis is based on traditional bank data along with non-bank data such as that from telecommunication and utility companies.

    Dun & Bradstreet chief executive Christine Christian said yesterday the research showed the need for lenders to ensure they were accessing the most comprehensive data available.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx