by Scott Pape - March 6th 2006
I’m famous for my Monday night pasta extravaganza. No really. I’ve honed my craft since I was a struggling student – so much so that I once had a former housemate knock at my door one random Monday evening knowing that (a) I am a man of routine and pasta would be served, and (b) it would be good.
Drop-in visitors (even hungry ones) don’t bother me in the slightest – at around $2.50 a serve it’s cheap. Yet last Monday, just as I was about to add my version of the Colonel’s secret spices to my signature dish, an unexpected visitor arrived – on the home phone.
Telemarketer: Good evening sir, you have been randomly selected to take part in our debt solutions experience. Are you having trouble servicing your debts?
Barefoot: No, but I am having trouble cooking my pasta.
Telemarketer: Is now not a good time to call sir?
Barefoot: Is it ever a good time to hear from a cold calling telemarketer trying to flog something?
Alas, the pasta would have to wait – the business of Barefoot beckoned. After 15 minutes giving bogus answers to equally bogus questions the telemarketer informed me that I was in luck – based on my answers I had qualified for a free in-home appraisal of my debt needs. ‘Thank god I’ve qualified for something’, I told him, ‘because in the time that I’ve been speaking to you my pasta has lost its lustre – it’s turned to rubber my good man’.
As part of my repayment for a ruined dinner I turned the tables on the telemarketer and asked him about his job. He informed me that he makes about 300 calls each evening, of which 290 immediately hang up (often using the Lord’s name in vain in the process), six are lonely ex-reality television stars just wanting to be heard, and four are losers like me who take the time to answer the questions and win the chance to move to the second step in the sales process.
To my reckoning ringing up people and asking them if they’re having trouble paying their debts should be like shooting fish in a barrel. With the average Aussie keeping the wolves at bay by feeding them (high interest rate) plastic, it’s an easy sell.
A November survey by Macquarie Bank of more than 900 mortgage brokers, financial planners, accountants and legal practitioners, found that 61.4 per cent of respondents expected to see an increase in mortgage stress and defaults in the coming year. These findings are reinforced by Victorian Supreme Court records, which show that more than 50 Victorian homeowners a week are facing the judge for falling behind on their home loan repayments.
Note to Eddie, forget about 1 vs 100 – this has the makings of a great show. Instead of a serious looking Supreme Court judge, we could instead have a drunken Dicko presiding over whether indebted contestants should be able to keep their homes – now that would be compelling TV.
The only thing that would offer more drama are those people who choose to implement the various ‘mortgage minimisation’ packages that are being flogged via the phone. According to Catriona Lowe, Co-CEO of the Consumer Action Law Centre, ‘most claims to reduce your mortgage involve paying more money – it’s as simple as that’. Given that a lack of money is the reason you’d entertain these packages in the first place, paying (in some cases) $5000 in up-front fees to a company in an effort to minimise your debts is strange logic indeed.
Of course the debt repackaging industry forms part of a much bigger and broader industry that is involved in selling debt. According to industry data some 40 per cent of new mortgages and up to 80 per cent of refinancing is now sourced through loan brokers, who are largely unregulated by authorities.
The introduction of mortgage brokers has generally been a good thing for consumers, who now have access to a wide range of loans from a wide range of providers. Even the much-maligned low-documentation loans provide a much-needed service to the self-employed.
The problems start with the inherent conflicts of interest of the industry. Just like financial planners, most mortgage brokers are remunerated by trailing commissions. Typically this involves an up-front payment of 0.7 per cent of the value of the mortgage and up to 0.25 per cent in trailing commissions – paid to the brokers by the banks for bringing in the business.
Let’s do the sums: on a mortgage of $500,000 that’s $3500 upfront and $1250 a year coming (indirectly) out of your pocket. With that much money on the table, it’s not surprising that there can be a temptation for fringe players to churn clients in and out of loans to line their pockets.
These conflicts were highlighted in a landmark NSW Consumer Credit Legal Centre report that uncovered major problems in the industry – not least the high upfront fees that are sometimes charged to unwary borrowers. The report found that some mortgage brokers acted dishonestly by signing up clients for expensive loans in an attempt to maximise their commission cheques. Often they failed to disclose these payments to the borrower.
The report called for national regulation of the industry, which makes perfect sense. Taking out a mortgage is one of the biggest financial decisions that a person will make, so it stands to reason that the person advising you should be held accountable to the authorities.
Unfortunately, common sense is not a prerequisite to becoming a politician, so it will no doubt take a long time (or a spike in interest rates) to become law. Until that time it’s important to understand that there are really only two ways to reduce your debt quicker: get the lowest effective interest rate possible (the effective interest rate is where all fees and charges have been factored into the rate), and make regular extra repayments.
So the next time a debt reduction cold caller rings, or a debt seller solicits, do one of the following. Either ask for their home number so you can ring them when they’re having dinner, or else tell them to skip the sales pitch because you have a pot on the stove. All you want to know is the effective rate they offer, and to detail what restrictions there are in making extra repayments. Then request them to put their answers in writing so you can get off the line and start enjoying your latest culinary creation before it gets cold.
Tread your own path!
Photo: http://www.flickr.com/photos/stawarz/2981086612/
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