One year into the credit crisis …

… and The Age does a feature on what it all means.

Other changes? Many non-bank mortgage lenders have all but closed for business. Wholesale funding is more expensive, and the mortgaged-backed securities market has collapsed. Last year, some $47 billion of Australian residential mortgage-backed securities were sold. In the past six months, this has shrunk to slightly less than $2 billion.

“It’s had quite a devastating effect on the mortgage industry,” says Joshua Gans, a professor at Melbourne Business School. “Now the big banks are the only ones who are able to loan in any significant volumes. We have lost competition.”

The most high-profile victim was RAMS Home Loans, whose profit downgrade contributed to the start of the August panic. It was struggling to refinance its debt just weeks after floating at $2.50 a share. Its founder, John Klinghorn, has pinpointed the moment things changed at August 9, 2007, when French bank BNP Paribas halted withdrawals from three of its funds, saying it could not “fairly” value subprime assets held in the funds.

“Up until Thursday (August 9, 2007), life was cool for us,” Klinghorn said in late August. “The market was clearly in turmoil in subprime. We are not in subprime. On Thursday, things changed. It was suddenly impacting everyone.”

Westpac “rescued” RAMS by buying the group’s brand name and franchise operations for $140 million.

Of course, many believe that this will just bounce back. There will be a simple test of that: when the RBA moves to reduce interest rates will bank mortgage rates follow? I guess we will see. I have a mortgage so I am hoping that they will.

3 thoughts on “One year into the credit crisis …”

  1. It will not “bounce back”. Securitisation is dead, at least in this form. Good riddance!

    The US is trying to revive securitisation with standard terms and a market for liquidity and valuation. Worth watching, but I hope not.

    The underlying problem is too much debt, and asset inflation. Your house needs to drop 50% in value, along with everyone else’s, and that will be painful when it happens.


  2. There is a simple solution to this problem as well and I have yet to hear an economist tell me why it will not work.

    When a loan is made for a house then the money is “tagged”. That money until it is paid off or used to build a new house can only be used to purchase a house.

    This will isolate house asset prices from the rest of the economy. That is house assets will “automatically” become less relative to other sectors but it will not punish those people who are genuine house buyers only those who wish to speculate – or those who already have.

    Tell me why this will not work if I can assure you that I know how it can be implemented for no extra cost?


  3. The Securitisation market is not dead by any means … just a little tarnished by the credit policies of a select few banks who bundled up alot of poor quality paper i.e. mortgagee assets and flogged them off through various structured products and blurring of ratings specifically applying to the paper in the portfolio. We have seen the complete market disappearance of the ‘buy side of a market’ which I believe will prove to be a very unique & real case study.
    Whoever calls the bottom 1st and is able to accumulate selected portfolio’s for next to nothing will again benefit from a market dynamic we all know and love so well of ‘buy low sell high’. For example, you cannot tell me some Aussie securitised paper will have 90%+ bad debts which in effect the conclusion of the price disparity of the current market.
    We may see these portfolios picked up for next to nothing and thence broken up and repackaged and sold on. I believe this is what our credit & market risk teams will be looking at in the near to medium term.


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