Mortgage relief plan could land Australia in crisis

by BN07 Apr 2009

Australia could be headed towards a US-style crisis due to the Prime Minister's "unemployment bail out plan", says managing director of Wilson National, Geoff Wilson.

According to Wilson, Australia is "in for tougher times ahead" thanks to Kevin Rudd's plan to encourage the major banks to offer 12 months of mortgage relief to people who become unemployed.

While Rudd's plan looks to ease the financial burden of households affected by the looming recession, Wilson said it could "single handedly lead Australia to the very situation which caused the financial melt down in the US."

He said that the financial melt down in the US was caused by providing finance to people in higher credit risk who weren't required to make payments for a fixed period, as is the case in Rudd's plan.

"We are creating the same market dynamics which lead the markets to fail in the US, by creating extended periods where people are not required to make a payment on their home loan for extended periods. This has the potential to create a much bigger problem than the one the Federal Government has set out to solve," he said.

Wilson added that the plan also created disequilibrium between the Big Four and the other lenders, including local building societies and credit unions, non-bank lenders, and other smaller and regional banks.
 
If the government was set on providing this type of assistance, he said, it should consider "some sort of rebate system where the fundamental market dynamics of the financial system are not compromised."

Related stories:

Major banks to offer mortgage relief

Resi: Non-banks already offering relief

Challenger extends relief to unregulated loans

 

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