The world catches a cold whenever the US sneezes

info · Joined: 07 Feb 2005 Posts: 23

1. IS my home loan safe?

Well, of course it bloody is! If anyone should be worried, it is your bank. If you think about it, the bank has lent you the money and they want to get the money back - with interest - so they'll be very keen to see that you are going to be able to keep up your mortgage repayments every week.

Your biggest concern is if the lender you have your mortgage with goes bust but at this stage there's no sign of that happening.

Australian lenders - no matter how big or small - are prudent in the way they operate and they won't be going down the gurgler just yet.

2. What has happened to RAMS?

The home loan lender borrows money from US investors in order to have enough cash to lend to future RAMS customers.

Earlier in the week RAMS said the inflow of money from the US investors had essentially dried up.

Yesterday RAMS said it had failed to complete a funding transaction worth about $6 billion.

Investors have lost confidence in RAMS, dumping shares yesterday. The stock price fell 35 per cent yesterday to 86c, after starting trading on the stock exchange three weeks ago at $2.50.

3. Will I pay more for my home loan if I am a RAMS customer?

At this stage, the answer looks like being yes. But RAMS won't be the only one. Some RAMS customers have already been slapped with a rise above the RBA's 25 basis points (0.25 per cent) rise last week. Some have been told this week they'll be hit with a 30 basis point jump.

4. What about the major banks? Will they make my loan more expensive?

At this stage the big banks are likely to sit tight and watch what happens. It is unlikely they'll go raising rates on home loans without being forced by the Reserve Bank just yet. The Commonwealth Bank said yesterday rates could rise across the market.

But they'll either all go together by a few basis points if things get really bad, or they'll stay where they are and make a grab at all the homeowners out there who will be looking for reliable lenders to join up with.

If you are about to buy a house and take out a mortgage, it is more likely you are going to now go shopping for a mortgage that may be a touch more expensive but is with a reliable lender.

5. What is the sub- prime market?

Put simply, a grubby bunch of lenders in the US giving out massive cheap loans to people who were on the brink. Many of these loans had fixed rates for 12 months or two years, during which time the US central bank raised rates four times. So all of a sudden the loans are being ramped up and homeowners are being caught out. It makes up about 15 per cent of the US mortgage market. The much more prudent and less risky low-doc loan sector in Australia is about 1 per cent of the mortgage market.

6. How does the US mortgage crisis make home loans more costly in Australia?

Let's say a lender like RAMS is relying on an investor sitting behind his desk in Texas. Suddenly that Texan has been burnt by his investments in the US, and he looks at RAMS and says to himself "that's going to go pear-shaped too" and he raises his palm and says to RAMS (adopt Texan accent) "talk to the hand, RAMS". The Australian lender then has to go elsewhere to find investors and could be forced to raise rates if there's no money coming in to fund future loans.

7. Should I fix my loan?

If you are worried, it might be a good time. But remember the cash interest rate set by the Reserve Bank at the moment is still pretty low. Financial research group Cannex says only one quarter of all residential home loans in Australia are currently fixed. In New Zealand that figure is 85 per cent. Cannex says this is because the fixed rate in New Zealand is more competitive than the floating rate. In Australia, it is the opposite with the two rates much closer.

8. Why is the share market falling?

The market fell 1.5 per cent yesterday and is now down about 12 per cent in the past 20 days. That is because of the subprime crisis, as the US market falls every day because there are more and more US firms and lenders being exposed over there.

The Australian share market pretty much follows the lead from the US, so once they fall 3 per cent in a day, you can almost bet your last buck the Australian, Japanese, Singapore, Hong Kong, Indian markets plus most of Europe will slide too.

But it is good to remember the Australian share market it is still just above where it was on January 1 this year.

It has been an absolutely stunning eight months across the globe for financial markets and this is simply part of the cycle of buying and selling. Australian investors have made a lot of money and are deciding it is a great time to sell. And of course, when a lot of people decide to do this at the same time, the market falls.

9. Why does it relate to the crisis in the US and what will happen?

Everyone is spooked because no one really knows what is going to happen. There are major lenders in the US and France, Asia and now RAMS in Australia saying they have indirect exposure to the problems in the US. Now that it is a global problem everyone is walking around trying to figure out how bad it is going to get.

Remember RAMS is a publicly listed company so it legally has to reveal what is going on with its books. Most of the 30 lenders that offer similar low doc loans remained tightlipped this week.

10. Should I sell or buy shares?

If you are a share day trader you will likely have had a smile on your dial for the past eight months. Keep buying and selling because there's plenty of money to make. If you own shares for the long haul, then why panic today? You should know about the highs and lows if you own shares and at this stage if you haven't taken the money and run you should stick around and wait for the storm to blow over.

The Australian market is down about 15 per cent from its July high.

That puts it well into the (category) of 10 per cent or more falls in Australian shares since 1989.

Ignoring the present fall, it is worth observing that of the eleven declines in Australian shares greater than 10 per cent since 1989, eight saw the market back to new highs within five months.