GREG RAY: Don’t bet your house

Nothing could ever go wrong, they were told.

 Why, if the couple struggled to make payments, the lender would only pursue the parents as a last resort.

No wonder the Australian Prudential Regulation Authority is nervous about lending standards at the moment.

APRA, which has the unenviable job of trying to stop lenders from over-extending themselves in the pursuit of new business and profits, has been jawboning the finance industry, complaining that things seem to be getting a little bit sloppy, here and there.

Apparently it’s getting harder and harder to write the volume of new loans the finance industry needs to chalk up the growth it wants to achieve, and the suggestion is that some lenders might be starting to cut corners again.

We have all heard of the US sub-prime mortgage crisis, where banks threw money at anybody with a pulse, then sold filing cabinets full of those loans to unsuspecting Australian local government investors and other naive charities across the globe.

We called that the ‘‘global financial crisis’’.

Some assert that the Aussie finance sector has been quite silly too, allowing some mortgage brokers to employ dodgy paperwork to make loan applicants look more solid than they really are. I’ve heard of some borrowers having their loan repayments stayed because evidence was uncovered of falsified income figures and forged signatures.

How widespread? Who knows?

But when the pressure is on to lend, lend, lend, this is the sort of stuff that can happen.

From the top to the bottom of the lending organisations, the message is to keep writing those loans, keep expanding the balance sheet, keep pumping up that big old balloon.

I was recently reminded of a column I wrote in 2008, when I spoke to Newcastle man John Smeaton about an experiment he’d just done.

John, an elderly ex-finance industry man himself, pretended to be a 22-year-old tradesman and phoned a heap of lenders, asking them for a $300,000 loan.

Interesting isn’t it, as an aside, just how much the bubble has inflated since 2008? Maybe then you could buy quite a lot with $300,000. Not so much today.

Back then John told the lenders he had no deposit and a variable work record with an annual  income between $40,000 and $50,000.

And even though practically everybody he spoke to was based in a call centre in India, they were nearly all willing to lend him 100per cent of the sum.

Only on one condition.

His pensioner parents, who owned their own home, would have to go guarantor.

Or, they could get a reverse mortgage on their home, using it as an ATM to withdraw funds to transfer to their son.

When John asked for an assessment of the risk of rising interest rates, slumping property values or risk to income due to economic downturn, he was advised not to worry. 

When he mentioned that, at the time of the first payment, the loan would be for a greater amount than the value of the house, he was told this was ‘‘just arithmetic’’.

Indeed, it is. But arithmetic is inexorable and unforgiving.

Stop making payments for a few months and see what arithmetic will do to you, and your pensioner parents.

I didn’t know this until last week, but John Smeaton died not long after after we spoke.

It was his wife, Judy, who phoned  to tell me about a young couple of her acquaintance who had been urged to sign their elderly parents onto the dotted line.

‘‘I’m sure John would have been on the phone to you if he’d still been here,’’ she said.

Just out of interest (to coin a phrase) I visited the websites of a number of reputable lenders and discovered that many of them actively market the concept of parents or other family members providing equity in their own homes to help their children get into the market.

I saw lists of benefits, but no lists of risks.

Apparently the number of court cases involving guarantor loans is increasing. Apparently some people are signing on as guarantors without fully understanding the implications for their own financial safety.

Who’d have thought?