Mortgage holidays are hiding a lot of pain. But if that pain makes it way on to the banks’ books, they’re in real trouble.
In less than 100 days, the Australian economy will topple over a cliff.
Australia is doing better than most nations right now (tell that to the one in five workers who lost work!), but the mountain of stimulus and support we’ve put in place is all due to end in September.
We’re talking about JobKeeper and the JobSeeker supplement, but we’re also talking about mortgage deferrals.
Remember that banks have been offering borrowers a ‘holiday’ from their repayments.
According to the Australian Banking Association, 772,600 loans have been deferred across Australia, including 480,700 mortgages.
That’s one in 14 mortgage holders – about 7% of the market. Substantial.
And while mortgages account for a bit more than half of the number of loans, they account for about three quarters of the value of loans deferred. $234.1 billion total loans have been deferred, of which $173.5 billion are mortgages:
So… so far, so good. A substantial number of loans have been deferred, but we’re not talking about the collapse of the mortgage market.
But the key thing here is how this shows up on the banks’ books.
Remember that when the deferrals were announced, some people wondered why the banks weren’t going further.
Because the loans aren’t simply being paused. Anything you miss has to be made up, in the time that remains. That pushes your minimum monthly repayments up somewhat.
And when they were asked why they were deferring rather than pausing the loans, the banks said that if they ‘paused’ the loans, they would be technically “impaired”.
An impaired loan is a loan that has gone bad, with a higher risk that it will not be repaid.
That has serious implications for the banks. APRA – the banking regulator – has rules about how much capital you hold against your loan book, and it depends on loan quality.
So, to make some numbers up, if you have $100 of high-quality loans, you might have to hold $10 in cash.
But if you have $100 of impaired loans, you might need to hold $20 or $30 in cash.
That is, if the banks pause the loans, the loans get treated as ‘impaired’ and that means the banks have got to come up with extra money to hold against those loans.
How much of a problem is that?
Well, economics grey-beard Alan Kohler does some back of the envelope calculations.
If the deferred loans were treated as impaired this year rather than deferred, and the big four’s share of them was the same as their 80 per cent share of total loans and advances – probably a safe assumption – impaired loan expense would be 16.6 per cent of their loans and advances and would more or less wipe out their capital…
After six months, the support program runs out in September, at which point, it is assumed, $224 billion in loans, plus whatever is deferred between now and then, would instantly become 90 to 180 days in arrears…
September is rushing towards the banks. How many of the 744,904 people and businesses, and counting, will be able to resume repayments? How long can loan deferrals go for? What proportion of the loans must be classified as impaired at September 30? What provisions must be struck for future impairments? How much capital would need to be raised to cover these sums? If it’s a 12-figure amount (that is, more than $100 billion), who will supply it?…
But if the government’s various income support packages end in September and October, as planned, the bank support will have to begin, or else the pandemic crisis will turn into a financial crisis like no other.
Yup. If October comes, JobKeeper ends and all these loans move from deferred to impaired (not even assuming more people end up in default), the banks get “wiped out”.
And it seems to leave the government with the choice of either nationalising the job market, or nationalising the banking sector.
Both options are ugly.
This is going to take some fancy footwork to get out of this one.
… and we’ve got 100 days and counting.