Sharing the Risk !

What happens if you stop paying household bills  ?   The usual outcome is to have electricity, gas and water disconnected and recovery of the amount owing put in the hands of a debt collection agency.   That could result in some big and aggressive people banging on your door.

What happens when a bank owes you money, and you don't even know about it  ?  That seems to be - nothing !   One of our big four banks made a simple clerical error when mortgages based on interest only payments changed to an interest and reduction regime in 2017.   As a result, thirteen thousand owner-occupiers with interest only loans were charged  an extra $ 11 million dollars.  This represented an average extra $846 paid on the outstanding loan because the required monthly reductions due to come into effect were not taking place.

Despite the time factor now in place, 12,800 of those customers are still waiting to be repaid.  Mostly, they are unaware of this error because it is the practice of the bank to notify them in the same letter that has the refund cheque attached.   The bank refuses to comment on when the last of these refund letter will be on their way to customers beyond saying that the bank was " working through " the problem in coming months.

We recently has a Royal Commission delve into the workings of our banking industry and it was not a pretty picture that emerged.  The big four banks have promised to mend their ways and many of the devious practices in play have ceased, but the risk factor pertaining to loans is still very much in the banks favour.

Recent instances of residents being forced to evacuate high rise apartment blocks because of building instability has shone the spotlight on mortgage risk sharing.   When an applicant applies to a bank for a home mortgage, acceptance is based on the applicant having an acceptable deposit and the bank accepting the house or apartment as the collateral to be resold should loan repayments fall into deficit.  The value of the mortgage is usually far short of the actual value of the building underpinning the loan.

We now have three high rise buildings in Sydney that have suffered damage due to structural construction errors, resulting in their residents being forced to find other accommodation.  The banks insist that the mortgagee is still responsible for the debt despite the value of the building underpinning the loan becoming virtually unsaleable. Should the mortgagee default on payments, the bank may pursue recovery by acting against any other assets in that persons name.

If a law change made both the bank and the mortgagee equally the loser when the asset forming the security for the loan developed a structural fault it would make the banks more interested in the integrity of the building companies involved and insistent that councils and certifiers take greater responsibility for constructions under their control.

There seems no valid reason why loan security should not be restricted solely to the collateral named in the mortgage document forming the basis for the loan.  That was the original reason both parties agreed to the loan.