Monday, December 13, 2010

Exit fees are all they had.

With Wayne Swan looking to pass legislation to ban mortgage exit fees, one must contemplate what effects this will have on the retail mortgage market. If banks are no longer allowed to write in compensatory fees/fines for terminating their agreement, they will lose control of their mortgage portfolios. Customers will move from bank to bank in search of the best rate, terms and conditions and the banks themselves will be squeezed to the limit, with increased competition making it almost impossible for them to make any money from the business of lending money.

Consequentially, this will lead to a decrease in the number of loans the banks will be willing to write, which will put pressure on both the housing market and the wider economy as they will be even less willing to fund small business growth. The worst case scenario, however, is the creation of regulatory conditions that encourages collusive behaviour.  This would make the mortgage business similar to the retail petrol business, where prices are almost identical between competitors and fluctuations are synchronised so as to not lose customers to competitors.

Yes, collusion and anti-competitiveness is investigated by the ACCC and punishable by the courts, but building enough evidence to prove such behaviour is extremely difficult, as the Visy case showed. It is much better to maintain an environment that promotes competition and fairness, than try and deal with the problem after contributing to its creation. Instead of banning them completely, the government should be looking to regulate the size of exit fees, to make them proportional to the size of the loan, while also taking into account the socio-economic status of the mortgage holder. Otherwise, they'll be chasing the proverbial horse after unlocking the stables.

No comments: