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SMH: Banks losing interest in mortgages

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Sounds like an excuse for raising mortgage rates!


BANKS could step back from lending to new home owners after making losses on new mortgages written over the last four months, according to the latest banking industry research.

A report from UBS Securities says higher wholesale funding costs and intense competition to write home loans have left the banks facing a ''dangerous situation'', with little incentive to offer mortgages.

Moody's ratings agency has warned meanwhile that Australia's banking system is ''most vulnerable'' to financial and economic shocks from the euro area crisis.

Advertisement: Story continues below Economists widely tip the Reserve Bank to cut rates by 0.25 per cent today after retail sales figures yesterday showed trade grew at its slowest pace in 50 years in December, despite two interest rate cuts totalling 0.5 per cent in the last two months of last year.

But Jonathan Mott, a banking analyst from UBS and author of the report, says banks will be left with a stark choice if the Reserve Bank does cut rates today. They can re-price the interest rate on new mortgages above the official cash rate, they can hope for wholesale funding markets to improve, or they can stop writing mortgages.

''We estimate the banks are currently losing money on new mortgages written in the current funding environment,'' the UBS report says.

''Unless the banks re-price mortgages or funding markets improve significantly, there is no direct economic incentive for the banks to continue to write new housing loans … We see this as a dangerous situation for both the banks and the broader Australian economy.''

The report suggests that as long as wholesale funding markets remain in disarray, in the event of a Reserve Bank interest rate cut banks will likely re-price their mortgage books, decreasing rates by 10-15 basis points - which is less than the predicted 25 basis point cut.

The need for banks to remain tied to the Reserve Bank's cash rate cycle has become an issue in recent months. ANZ announced plans in December to make its interest rate decisions independently of the Reserve Bank, on the second Friday of each month.

That means ANZ's customers and competitors will be keenly watching to see what it does this Friday.

After TD Securities data yesterday showed inflation sitting below the Reserve's cash rate target of 2.5 per cent, the Commsec economist Savanth Sebastian said the Reserve was likely to reduce the official rate to 4 per cent.

''We really haven't felt the impact from the first two rate cuts just yet,'' Mr Sebastian said.

''So I think the Reserve Bank will probably cut this time and then sit back and assess how the economy is travelling.''

Meanwhile, the ratings agency Moody's has warned that banking systems in Australia, New Zealand, Korea and Vietnam are ''most vulnerable'' to contagion from a crisis in the euro area.

Identifying five ''key risk'' factors - dependency on external funding, the amount of credit sourced from European banks, export reliance, overall banking system strength, and a government's capacity to provide support - Moody's warned that, though this was not its ''central scenario'' for its outlook for the year, a sharp deterioration in the euro area crisis could hit Australia's banking system hardest.

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Yeah perhaps you're right. Maybe it's a public relations campaign to give a "reason why" they will increase rates, without too much fighting from borrowers

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yeah we hear from spruikers often about how to lowering rates will destroy the housing market.

and from the banker spin doctors, how banks no longer lending money for housing will destroy the housing market

well theres one thing we agree on, the housing market is going to be destroyed.

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