Mortage defaults: Why is Ipswich Australia's mortgage default capital?

Ipswich homeowners mortgage repayment defaults  the highest in Australia says ratings agency Fitch Ratings

And Queensland is the Worst performing State in Australia on mortgage repayments. So why is this?

In a word, Floods. Queensland has has two major Cyclones hit in two consecutive  years in 2010 and 2011, and recovery is only half done. Many people and businesses will never recover. So mortgage defaults are only one sad statistic in all this.

Mortgage defaults in Ipswich are very low by US and World standards.

First let's make the point that even in Ipswich, which is the worst performing area in mortgage repayment arrears. Its still pretty damn good compared to other real estate markets in the World.

The results don't mean mortgage holders are defaulting on loans, but do point to economic hardship by region, caused by a one off event that will take another year or two to fully resolve.

The Fitch ratings report, which looks at how many mortgage holders are more than 30 days in arrears, ranked Ipswich City first on a list of the worst-performing regions by number of home loan delinquencies.

More than one in 50 mortgages in the Ipswich region are over a month in arrears, with a 25% increase being recorded in the six-month period from September 2011 to March 2012. 

Overall, 2.14% of all mortgages in Ipswich City are now more than 30 days in arrears, up from just 1.28% in March 2010. 

Ipswich has a lot of low cost homes

The makeup of Ipswich home buyers is an important factor in mortgage defaults. Ipswich has many fine new estates. But it also has a lot of low lying flood prone and flood affected building areas, as well as a lot of older areas that were inundated.
So these homes were lower value and these homes attracted home buyers with lower incomes. They got hurt more than homeowners on higher incomes.

The Floods of 2011 has had a major impact on mortgage defaults in Ipswich

The floods that swept through Ipswich impacted homes directly, and home values going forward.

After the floods people thought twice about buying a home in Ipswich.
So house prices fell most there and people that were struggling yet not sell their homes.

Many homeowners did not have the right insurance

Many insurance companies never covered for flood damage and this has impacted on homeowners that were flood affected to recover form that damage.
And post floods, the insurance premiums for those properties so affected are simply out of reach for many in those areas.
This has to reflect in home values and future mortgage conditions on those properties.

Ipswich industries were greatly impacted by the Brisbane Floods

Many Ipswich businesses were inundated by the Floods. This has hurt homeowners in many ways.

• Many small businesses were not correctly insured and so many of these businesses never recovered.
• So both the business owners and their employees lost incomes.
• Many businesses that did get a payout decided to quit the area, as it would take the area years to recover fully, and they could see that they could take their money and reinvest elsewhere with less risk.
• Even where businesses stood down employees whilst the repairs were conducted. That can leave a hole in their budgets that takes years to make up.

Many of the mortgage lenders who operate in the Ipswich area cite a lot of cases of hardship and unemployment as contributing factors. Most of those relate directly to the Floods.

These factors affected many regions of Queensland, but Ipswich and Logan City were affected more because of the stronger concentration of borrowers with a lower average income, and those tended to be in low lying areas.

Summary of Other badly performing Mortgage repayment areas in Australia

Mortgage Delinquencies: Australia 10 worst-performing regions with more than 30 days in home loan arrears:

1. Ipswich City - 2.14%
2. Outer SW Sydney - 1.89%
3. Gold Coast West - 1.89%
4. Central Coast Sydney - 1.85%
5. Logan (& Beaudesert) - 1.84%
6. Caboolture Shire - 1.76%
7.  Fairfield-Liverpool - 1.73%
8. Gold Coast East - 1.69%
9.  Blacktown - 1.60%
10. Outer West Sydney - 1.60%

Source: Mr Mortgage

Mortgage Loans: Fannie Mae Squeezes Mortgage Standards

Home Buyers and Refinance: US Home buyers and refinance applicants will soon find mortgages harder to set

Fannie Mae gets tough with Home Loan Borrowers and Mortgage Lenders 

Fannie Mae is the largest source of money for the U.S mortgage industry and has warned mortgage lenders it will be raising some of its qualification standards for people buying homes, whether first homes or second home buyers, and also for those seeking mortgage refinance.

The changes to Fannie Mae Mortgage standards include lowering Loan to Value Ratios 

In the past mortgage borrowers could buy homes with no money down in some cases, but typically a 3% deposit [down payment] would get home buyers over the line.
Starting from October 2012, the changes to lowering loan to value ratios for some adjustable-rate mortgages to 90 percent, down from a maximum of 97 percent.
Mortgage applicants also require a better credit history than previously, with an increased credit scores requirements for certain loans.

Low doc home loans for the self employed tightened 

Fannie Mae also will start demanding more tax returns from self-employed borrowers. Many are expecting that many borrowers in self employment will suddenly find many mortgage avenues closed to them, and this may make some homes harder to sell.

Tougher Guidelines for Mortgage lenders 

Fannie Mae (FNMA) and its smaller Government Sponsored Enterprise mortgage intermediary Freddie Mac, guarantees mortgage-backed securities financing of two-thirds of all new loans, so more misery for the housing market is likely to continue for some time
Fannie Mae told mortgage lenders that the adjustments were part of regular reviews of data and loan performance.

Stricter Reporting standards

Both Fannie Mae and Freddie Mac will need to provide annual reports on actions they are taking “to reduce taxpayer exposure to mortgage credit risk.” The requirement is part of changes to the companies’ bailouts agreements the Treasury Department last week.

Credit Scores and Credit history

Fannie Mae’s tightened standards include an increase of minimum credit scores for adjustable-rate mortgages needing to be at least 640, up from a previous minimum of 620, [on a scale ranging from 300 to 850, with 850 being clear credit], and removing flexibility to move on this with mitigating circumstances. 

The concept of benchmarking will also be eliminated. 

Instead, 36 percent will be the “stated maximum,” [This ratio can be as high as 45 percent if the borrowers meet credit score or cash reserve thresholds.] This “provides more transparent requirements with regard to how compensating factors must be applied,” 

Borrowers without credit histories will only be able to apply for single family homes they intend to live in [owner occupied].

Appraisals to be more thorough

Fannie Mae will now require a full inspection to appraise the value of the property. [No more drive by, or kerb-side appraisals will be accepted.
Sworn Appraisals will mean valuers will be liable for overstating values and this has also been a problem in Australia in the past. 

Duplex dwellings are the exception

An exception to loan tightening is duplex dwelling unit blocks upping LVR to 85% Fannie Mae is loosening some standards with the loan-to-value ratio allowed for some fixed-rate loans on two-unit properties will increase to 85 percent, from 80 percent. Down payment requirements [deposits] also will fall for certain co-op loans. It is obvious where people buy a duplex home and rent one unit out, that these people will have fewer problems in repaying the mortgage.

Australia is watching these mortgage tightening

These developments are being watched in Australia, with several similar recommendations being made by the RBA and other Peak finance groups concerning Low doc loans and Loan to value ratios and even interest only home loans.

Mr Mortgage

Commbank says no to mortgage interest rate cut

The Commonwealth Bank's chief executive Ian Narev has ruled out a rate cut independent of the Reserve Bank in the short-term.

The major banks have increased mortgage rates relative to the Reserve Bank's cash rate since the onset of the financial crisis, by lifting rates when the Reserve has kept them on hold, increasing them by more than the RBA's cash rate rises, or not passing on the same percentage point reduction as the RBA when official rates have fallen.

Westpac's chief executive Gail Kelly and Mr Narev had both intimated previously that their banks will eventually reduce their mortgage rates relative to the cash rate as funding costs ease.

However, speaking to AM, Mr Narev says funding costs remain high, meaning that a potential home loan rate reduction relative to the Reserve Bank's cash rate will have to wait.

"You've got to bear in mind that what puts pressure on our wholesale funding is the cost of new funding relative to the cost of the funding it replaced, which isn't usually funding from a month ago, it's funding from two or three years ago, and that continues to go up," he said.

"The other factor we've got here is that deposit competition is increasing and, as I said before, depositors do well, but that does continue to put pressure on our deposit pricing so, as we sit today, unfortunately we're not at the end of a cycle where funding costs are going up."

Ian Narev says that situation is unlikely to change in the short-term while volatility and uncertainty about Europe's economic future reigns.

"We think there must be a solution, it involves greater integration, but we can't see how that solution's going to be workable politically and I continue to hold that view today. And I don't think that uncertainty's a good thing for the global economy or indeed the economy here in Australia," he observed.

"So, we don't foresee a big disaster in Europe, although that is a possibility, but at the same time we can't really see yet what the catalyst is going to be for a significant improvement."

However, despite the prospect of mortgage rates remaining high relative to the cash rate and the bank's record $7.1 billion profit, CBA's chief has brushed aside calls for a another banking enquiry.

"We do think it's a very competitive banking system, so I don't think you need an enquiry to tell as that. And indeed we've had various versions of enquiries trying to get at that and, I think what I've said before on the impact on margin shows that it is competitive," he added.
"But there are legitimate questions about Australia's long-term funding that need public debate and, if the way to do that is through an enquiry, then we would be happy to participate in that."

Source: Mr Mortgage 

House Prices collapse deflated US household net worth

Since the sub-prime home loan bubble burst in 2007 causing house prices to fall 40%, Americans have suffered a record decline in household wealth to 1992 levels

According to a Federal Reserve report on the recent recession, the median family's net worth dropped nearly 40 per cent during the three-year period, and this is linked directly to declines in house prices.
This was the biggest drop in net worth since the survey started in 1989.

House equity linked to net worth?

The problem I have with this notion is that the family home should never be viewed as an investment, and no self respecting financial planner would use the family home as a gauge of personal wealth.

Household wealth in the US now stands at 1992 levels as house prices slid

The median net worth, [the value of assets less debts], plunged from $126,000 to just $77,300 in 2010 , which brings it thudding back to 1992 personal wealth levels. These figures also show that most people's "wealth" is tied up in their homes. Which says a lot for the real wealth of people in the US.

Personal wealth in the US appears to be a mirage, if you accept the notion that a home should never be included in a net worth sum.

"Housing was of greater importance than financial assets for the wealth position of most families," the Fed said.
"A substantial part of the declines observed in net worth over the 2007/10 period can be associated with decreases in the level of unrealized capital gains on families' assets," the Fed said.
"The share of total assets of all families attributable to unrealized capital gains from real estate, businesses, stocks, or mutual funds fell 11.6 percentage points to 24.5 per cent in 2010," it said.

We must be forget that many in the US used their homes as cash machines and extracted all the equity from them to fuel their lifestyles, so they would have suffered hard, and many of those would have lost their homes or had their net worth under water.

Household debt levels overall are unchanged

While the overall level of debt owed by families was unchanged, debt as a percentage of assets rose to 16.4 per cent in 2010 from 14.8 per cent in 2007 because the value of the underlying assets, especially housing, decreased faster.

People shed credit card debt.

The share of families carrying a credit card balance fell 6.7 percentage points to 39.4 per cent in 2010. The median balance fell 16.1 per cent to $2,600 in 2010 from $3,100 in 2007. The proportion of families with debt payments greater than 40 per cent of their income was nearly unchanged between 2007 and 2010. These were obviously people who were caught in the debt trap but retained their jobs.
People have hitched their wagon to house prices always appreciating, as a way to built net worth. This is faulty thinking in my view, and why the US housing market has not recovered. It is simply seen as a bad investment, instead of what it is, Place to live and bring up a family in a stable environment.
 Mr Mortgage