REP 119 Protecting wealth in the family home
Released 13 March 2008.
An examination of refinancing in response to mortgage stress
This report draws on a qualitative examination of a small number of transactions, where brokers arranged refinances of home loans for borrowers in financial difficulties. It analyses the conduct of the parties involved, with a view to drawing lessons which may help consumers, brokers and lenders in similar circumstances make better decisions.
This report also analyses the practice of ‘equity stripping’, where fringe brokers refinance vulnerable borrowers in financial stress into loans they cannot afford, in order to earn substantial fees. We analysed 3 refinances in detail. For these 3 borrowers, the refinance cost them on average 27% of the equity they had accumulated in their home, and a minimum of $20,120 in fees and charges.
While it may only examine a small number of transactions on the margins, the report demonstrates that there are problems with consumer decision-making, in some cases contributed to by broker advice that is motivated by self-interest, and lender’s procedures.