HLI - Helia Group

[Ves]

One thing that crossed my mind; With the banks being forced to raise their capital buffers and receiving no capital requirement offset for insured mortgages the banks might be thinking - we have to hold the capital anyway, why not self insure and claw back some of the lost ROE from higher capital requirements.

That's a good point. I did consider that if the big banks were taking a lot more LMI in-house it would mean that the overall risk in Genworth would probably reduce as the Big 4 seem to be responsible for most of the higher LVR loans on their books. Whilst this probably means lower margins, it could also be offset by lower delinquencies. I think it's a positive, lower returns perhaps, but much less earnings volatility (and business default risk) over the cycle.

Additionally, as a going concern, there is also some possibility that if APRA is reining in the big banks, that the medium and smaller sized loan writers may see more business within their capital limits, which could have a flow-on effect to GMA.

David Murray's financial services enquiry recommended that mortgage insurance be recognised in the capital framework where appropriate, if that ever gets implemented it would be a game changer in favour of GMA retaining the banks as customers.

I didn't realise that this was in the Murray enquiry. I did realise that Genworth have lobbied for this change very hard over the years and continue to do so. If you think about it, it's a solid recommendation. Not sure what the politics (and vested interests) involved are, though.

I think this sort of stuff, would be a big bonus, but not something I would want to have to include in a valuation to justify purchase.

Definitely some good discussion going on here.

 

[McLovin]

What happened in 2010 in GMA's business? The claims development triangle (4.4b - annual report) basically reduced by 2/3rds from the prior year. Did they reduce their business or was this actually a genuine reduction in what they thought they'd pay out? They haven't underestimated (so far), to be fair. In fact conditions look very benign per that table. If I'm reading that correctly, it is a decent map of where things can go when GFC type events hit.

Based on the LVR / change in price / insured amounts in their 30 June 2015 presentation, I'm a lot more comfortable with say a 15% fall in house prices and approaching 5% delinquency than I was initially. They'd still lose a lot of capital, maybe even up to the excess amount above, but I don't think it'd come close to knocking them out. Would be still equity left.

Does LMI protect the lender if the borrower goes into negative equity but is still keeping up with their payments?

 

[Ves]

What happened in 2010 in GMA's business? The claims development triangle (4.4b - annual report) basically reduced by 2/3rds from the prior year. Did they reduce their business or was this actually a genuine reduction in what they thought they'd pay out? They haven't underestimated (so far), to be fair. In fact conditions look very benign per that table. If I'm reading that correctly, it is a decent map of where things can go when GFC type events hit.

I'm not 100% sure of the answer to this question. I did find out that the IPO was delayed in 2012 because the company's pre-2009 loan book in particular started performing really badly. Lots of claims were made etc. I'm not sure if it has anything to do with that. They seem to have cleaned up a lot of that mess, and the selling point of the 2014 IPO was along those lines if you read parts of the prospectus on claims.

It does go to show how cyclical this industry does become. It's a pity that we have no financials before the 2010 comparatives.

There's a few articles if you do a google search for the failed 2012 IPO. I think a big pension fund in the US even threatened to sue the American arm for false information.

Does LMI protect the lender if the borrower goes into negative equity but is still keeping up with their payments?

Nope, it only applies to loan defaults (ie. when the borrowing stops making payments and the loan gets called in). They can't force you to sell your house if the market goes backwards, so there can be no claim, as the lender hasn't made a loss on the loan at that point.

 

[Rainman]

... Like most things in life, the beauty of situations like this are that they are not black and white. Often you can find something you're on the bearish side of for instance, but the market can be potentially far more bearish than you. It's all about probabilities and nuances by that stage.

Thanks craft, I haven't go around to checking out Genworth US yet. I'm sure their story is a rollercoaster given what happened in the last decade.

Genworth US is a very different business to GMA - a worse business, although it too is extremely cheap. Genworth US has a long term care insurance business which has turned out to be a real dog. GMA, by contrast, is a straight mortgage insurer.

I think, when looking at GMA, naturally one needs to weigh the prospect of a serious housing downturn occurring in Australia. But any assessment of that probability needs to be realistic.

If one is going automatically to use the US subprime mortgage crisis as the measure of how bad things could get in Australia, one needs first to show just why the US subprime crisis is an applicable example. Too often, the US subprime crisis is evoked in the context of the booming Australian property market simply because it is the most recent housing crisis one can think of. But that is just lazy analogizing: like generals who are always preparing for the last war. Instead, one should be asking whether the most important conditions that caused the housing bubble to grow as big as it did in the US and to pop as spectacularly as it did are present in more or less the same form in Australia.

It does not follow that, simply because house prices may fall, a wave of defaults ensues. Studies have shown that house prices need to fall to an extent that places the mortgagor deep in negative equity before mortgage defaults turn from a trickle into a tsunami. In fact, even when mortgagors are in negative equity, most fight tooth and nail to keep their home. The decisive factor on whether they continue to do so is their ability to continue to service the mortgage.

Sure, we have low interest rates in Australia. We have an RMB securities market that allows lenders to securitize mortgages and get them off their books. Both were necessary but not sufficient conditions for the US subprime crisis. But I haven't seem anything like the deterioration in lending standards in Australia that preceded the US subprime crisis. Also, the "crisis" part of the US subprime crisis was the collapse in property values. Most subprime borrowers had very little or no equity in their homes and were on adjustable-rate mortgages. So when the US Fed began raising rates in 2006, these borrowers could not refinance their mortgages and were stuck with the higher adjusted rate, resulting in a wave of defaults. That, in turn, caused property prices to collapse. Property prices collapse only because there are a wave of sellers desperate to sell and no buyers.

This last aspect is important because, as things currently stand, GMA's claims costs have been going down largely due to the fact that, where mortgagors default and the property is sold, the rise in property values has allowed GMA to recover almost all of its claims costs. Thus, between 1H2013 and 1H2015 GMA's average claims cost has gone down from $80,000 to $49,000.

This is not to say that Australian property prices will not decline. But what is required is a decline and a meaningful uptick in defaults and one does not inevitably follow the other. There is an uptick in defaults in certain parts of Australia - most notably in the mining states. But this is a very small part of the Australian mortgage market. Defaults in Sydney and Melbourne which receive the most press coverage over rising property prices have remained fairly stable over the last several years.

Across Australia, GMA has seen mortgage defaults since June 2013 go from 0.34% to 0.40%. There is a trend here. But whether that trend continues and becomes meaningful remains to be seen. For those who think it will, GMA is probably a stock to be avoided. But for those who think it won't, GMA offers a pretty attractive risk/reward proposition at its current level, in my view.

 

[craft]

I think, when looking at GMA, naturally one needs to weigh the prospect of a serious housing downturn occurring in Australia. But any assessment of that probability needs to be realistic.

Yep, GMA is a macro bet on housing valuation..... end of story for me - too much earnings risk that I don't have the competence to assess, Maybe on the backend of a major down turn which shakes it to its core I might be interested, that is when, with my limited knowledge I would be more confident that they have priced the risk they carry effectively. But I'm a pussy.


A perspective on why housing/land may be overvalued from a long term perspective.

https://www.prosper.org.au/wp-content/uploads/2014/02/Prosper-Australia-Senate-Housing-Submission.pdf

A good RBA speech for another perspective.

http://www.rba.gov.au/speeches/2015/sp-dg-2015-08-12.html#t4

 

[skc]

Yep, GMA is a macro bet on housing valuation..... end of story for me - too much earnings risk that I don't have the competence to assess, Maybe on the backend of a major down turn which shakes it to its core I might be interested, that is when, with my limited knowledge I would be more confident that they have priced the risk they carry effectively. But I'm a pussy.

+1. That's similar to my conclusion at the end of my research. It's an instrument to place bets on the cycle and we are certainly nearer to the top than we are nearer to the bottom.

The market may or may not have mis-priced the risk... and if I have to guess I'd say it has probably oversold the potential risks. But I don't make a large enough number of these bets to ensure it is a successful venture overall.

Best of luck Rainman. And thanks for provoking a very informative discussion.

 

[Rainman]

Yep, GMA is a macro bet on housing valuation..... end of story for me - too much earnings risk that I don't have the competence to assess, Maybe on the backend of a major down turn which shakes it to its core I might be interested, that is when, with my limited knowledge I would be more confident that they have priced the risk they carry effectively. But I'm a pussy.


A perspective on why housing/land may be overvalued from a long term perspective.

https://www.prosper.org.au/wp-content/uploads/2014/02/Prosper-Australia-Senate-Housing-Submission.pdf

A good RBA speech for another perspective.

http://www.rba.gov.au/speeches/2015/sp-dg-2015-08-12.html#t4

Thanks for the links.

I found the first of the papers the most informative, particularly page 8 which dealt with the debt-to-cashflow ratio. The authors rightly acknowledge that this ratio is key because it goes to the serviceability of per capita debt of which mortgage debt is overwhelmingly the dominant form of debt for most Australians.



The authors say that, where the ratio rises to 20 and above, it is in the "calamity zone" and seriously threatens "household solvency" (interestingly, the "calamity zone" is not a precise measurement, the authors note, but is merely a "rule of thumb" - whatever that means). As you can see from the table, both housing and investment stock peaked in the "calamity zone" in 2008 and both have been steadily declining since then. The table is current up to 2013 and this paper was written at the end of February 2014. I'd be interested to know whether the trend has reversed and started climbing back into the "calamity zone" since the data were gathered in 2013.

By leaving the answer to that issue hanging renders the dire predictions of the paper a little underwhelming because the size of mortgage debt is meaningless unless one can get a sufficiently clear measurement of the ability of borrowers to service that debt. Until and unless the debt becomes so great that borrowers can't service it, you are not going to get a mortgage meltdown in any meaningful proportion.

 

[Rainman]

Yep, GMA is a macro bet on housing valuation..... end of story for me - too much earnings risk that I don't have the competence to assess, Maybe on the backend of a major down turn which shakes it to its core I might be interested, that is when, with my limited knowledge I would be more confident that they have priced the risk they carry effectively...

In light of the recent discussion on whether Australia is or is not in the midst of a property bubble that is about to burst (or to seriously deflate) à la US subprime mortgage crisis, I was reminded of the phenomenon of "representiveness bias" to which the psychologist Daniel Kahneman first drew attention in his book Thinking Fast and Slow.

In Contrarian Investment Strategies: The Psychological Edge (a great book for value investors) David Dreman describes the form that this bias typically takes in assessing stock market opportunities:

"In the market, representiveness might take the form of labelling two companies or two market environments as the same when the actual resemblance is superficial. Give people a little information and click! they pull out a mental picture they're familiar with, though it may only remotely represent the truth. The two key ways that representiveness bias leads to miscalculations are that it causes us to give too much emphasis to the similarities between events and does not take into account the actual probability that an event will occur and it reduces the the importance that we give to variables that are actually critical in determining an event's probability" (underlining added).

I can't help but think that much of the fear that a slowdown in the Australian mortgage market will lead to something like, even if not on the scale of, the US subprime crisis is an example of representiveness bias at work.

Just my penny's worth.

 

[craft]

Thanks for the links.

I found the first of the papers the most informative,

The first paper is interesting to me for the length of the data, but the RBA link is the really interesting one for me as it’s the first I have seen them talk about how the wealth effect from increasing home values is changing and the intergenerational aspects .

The complication here comes from the fact that Australians are both owners of housing assets and consumers of housing services. We don't just own housing and the land on which it is built, but we also live in that housing, and on that land. And that housing and land provide us with valuable services.

If housing is fairly valued – in the sense that the price of housing is equal to the present discounted value of the future rents – then the rise in prices implies an increase in the expected future cost of housing services.

So, from the perspective of society as a whole, much of what is gained on the one hand is lost on the other: there are windfall gains from higher land prices but then everyone pays more for housing services.[10]

How any one individual is affected by all of this depends upon their own circumstances.

It is quite likely that these trends will continue with it becoming more commonplace for parents to help their children in the property market. This has both economic and social consequences. Of course, if this type of intergenerational assistance does become more common, then fewer parents will be able to use the capital gains that they have benefited from to boost their own consumption. Instead, in effect, they will be using those capital gains to support the following generations with their higher housing costs. Alternatively, if it turns out that today's generations use their capital gains to increase their own spending, then they will have less ability to help their children. If this were to happen, I suspect that, over time there would be some downward pressure on the price of housing, relative to incomes, as future generations deal with the high cost of housing.

 

[Gringotts Bank]

Thanks for the links.

I found the first of the papers the most informative, particularly page 8 which dealt with the debt-to-cashflow ratio. The authors rightly acknowledge that this ratio is key because it goes to the serviceability of per capita debt of which mortgage debt is overwhelmingly the dominant form of debt for most Australians.

http://getgreenshot.org/

Handy.

 

[craft]

In light of the recent discussion on whether Australia is or is not in the midst of a property bubble that is about to burst (or to seriously deflate) à la US subprime mortgage crisis, I was reminded of the phenomenon of "representiveness bias" to which the psychologist Daniel Kahneman first drew attention in his book Thinking Fast and Slow.

In Contrarian Investment Strategies: The Psychological Edge (a great book for value investors) David Dreman describes the form that this bias typically takes in assessing stock market opportunities:

"In the market, representiveness might take the form of labelling two companies or two market environments as the same when the actual resemblance is superficial. Give people a little information and click! they pull out a mental picture they're familiar with, though it may only remotely represent the truth. The two key ways that representiveness bias leads to miscalculations are that it causes us to give too much emphasis to the similarities between events and does not take into account the actual probability that an event will occur and it reduces the the importance that we give to variables that are actually critical in determining an event's probability" (underlining added).

I can't help but think that much of the fear that a slowdown in the Australian mortgage market will lead to something like, even if not on the scale of, the US subprime crisis is an example of representiveness bias at work.

Just my penny's worth.

Where is this discussion you are talking about. It appears that is you talking about things not being like the USA rather then anybody particularly saying that it will be. You no doubt would be aware of confirmation bias and bias blind spot.

For me I look at Australian Housing and see high valuation on many fronts. No idea if that situation will reverse and even less idea how exactly it may trigger or unfold. Simply know I don't like buying high valuation situations and even less things leveraged to them. GMA for me has too much earnings risk because I don't know what happens to Aus housing in the future. I don't run an investment strategy suited to dealing with a lot of earnings risk so its a pass for me.

 

[Rainman]

Where is this discussion you are talking about. It appears that is you talking about things not being like the USA rather then anybody particularly saying that it will be...

Clearly, you have not been following the entire thread on GMA. See the posts by Satanoperca (or whatever his name is) on this thread. His argument is basically that the Australian mortgage market is on all fours with that of the US pre-2007.

Satanoperca's posts apart, the general thesis against GMA is that Australian housing is overvalued = a crash is imminent = mortgage defaults will rise dramatically = GMA will suffer large and unrecoverable claims losses. Each of these links in the causal chain is theoretically in general but, applied to the Australian housing market as it currently exists, breaks down for lack of evidence in the particular.

I agree that there is earnings risk in GMA but not as a result of a large increase in a wave of mortgage defaults in the foreseeable future. Rather, it resides in the risk of CBA following WBC and not renewing its agreement with GMA in 18 months time.

 

[Triathlete]

Keen to see you can share the same Triathlete

The one that comes to mind was Forge group and this is because I nearly invested in this company based on Fundamentals alone and at the time was also supported as a buy by two of the best known Fundamental investment advisory firms in the country which I will not name here.

I would have thought with all these analyst looking over the companies balance sheet that someone would have picked up that something was not quite right and both these companies got it wrong and to think that investors pay for this information.

Just looking at a chart at this time was enough for me to stay out of the company until the technicals supported what was being said about the company even though the fundamentals were good at the time.

For me the chart is my insurance no matter how good the fundamentals look.

Technicals need to support Fundamentals ,otherwise I stay out until they do.

That is my rule...this has kept me safe in the market...

 

[DeepState]

Thanks for the links.

I found the first of the papers the most informative, particularly page 8 which dealt with the debt-to-cashflow ratio. The authors rightly acknowledge that this ratio is key because it goes to the serviceability of per capita debt of which mortgage debt is overwhelmingly the dominant form of debt for most Australians.

View attachment 64570

The authors say that, where the ratio rises to 20 and above, it is in the "calamity zone" and seriously threatens "household solvency" (interestingly, the "calamity zone" is not a precise measurement, the authors note, but is merely a "rule of thumb" - whatever that means). As you can see from the table, both housing and investment stock peaked in the "calamity zone" in 2008 and both have been steadily declining since then. The table is current up to 2013 and this paper was written at the end of February 2014. I'd be interested to know whether the trend has reversed and started climbing back into the "calamity zone" since the data were gathered in 2013.

By leaving the answer to that issue hanging renders the dire predictions of the paper a little underwhelming because the size of mortgage debt is meaningless unless one can get a sufficiently clear measurement of the ability of borrowers to service that debt. Until and unless the debt becomes so great that borrowers can't service it, you are not going to get a mortgage meltdown in any meaningful proportion.

I don't understand the chart. If mortgage debt to net cashflow is around 20, then an interest rate of 5% would leave nothing to put food on the table, pay off credit cards, ... or any of the principal.

The serviceability of debt has improved since despite increasing housing debt to disposable income ratios. This occurs because interest rates on the debt has declined in the interim.

 

[McLovin]

I don't understand the chart. If mortgage debt to net cashflow is around 20, then an interest rate of 5% would leave nothing to put food on the table, pay off credit cards, ... or any of the principal.

The serviceability of debt has improved since despite increasing housing debt to disposable income ratios. This occurs because interest rates on the debt has declined in the interim.

I think it's measuring the gross rental income that can be generated from the stock of housing (real and imputed), not the income of households.

 

[Rainman]

Ok I'll play
$1000
it's lower than $2.44 in 12 mths.

Get your cheque book out, Daffy Duck.

 

[tech/a]

Get your cheque book out, Daffy Duck.

Joe got my direct transfer of 1 k when I said I would in September.

He keeps it win or lose.

I said sentiment would win in a month---so that's still going.
You then made it a year so that is also still going.
Show me where I said it would never trade above $2.44.

Start saving!

Now if you want to take up the second part of the bet Ill send Joe off another K
and ill trade it in and or out as the bet states. Joe keeps another K wether I win or lose.

You send him a K in 12 mths if I perform better than you as stated in the bet
and another K if Sentiment (price) is lower than $2.44 in 12 mths.

Joe gets 2K regardless---if you take up the bet.(Stage 2)

You have a habit of moving goal posts.
But hey Joe has a good cause happy to support.

 

[Rainman]

Show me where I said it would never trade above $2.44

You did not say that GMA "would never trade above $2.44". As I quoted you above, you must know that.

You said you bet that "it's lower than $2.44 in 12 mths". They are your words.

Now, any reasonable person who speaks the Queen's tongue would understand your words to mean that you were betting against GMA being higher than $2.44 at any time over the course of the next 12 months.

By that measure, you lose.

 

[tech/a]

You did not say that GMA "would never trade above $2.44". As I quoted you above, you must know that.

You said you will bet that "it's lower than $2.44 in 12 mths". They are your words.

Now, any reasonable person who speaks the Queen's tongue would understand your words to mean that you were betting against GMA being higher than $2.44 at any time over the course of the next 12 months.

By that measure, you lose.

We must all speak Swahili

 

[Rainman]

Joe got my direct transfer of 1 k when I said I would in September.

He keeps it win or lose.

I said sentiment would win in a month---so that's still going.
You then made it a year so that is also still going.
Show me where I said it would never trade above $2.44.

Start saving!

Now if you want to take up the second part of the bet Ill send Joe off another K
and ill trade it in and or out as the bet states. Joe keeps another K wether I win or lose.

You send him a K in 12 mths if I perform better than you as stated in the bet
and another K if Sentiment (price) is lower than $2.44 in 12 mths.

Joe gets 2K regardless---if you take up the bet.(Stage 2)

You have a habit of moving goal posts.
But hey Joe has a good cause happy to support.

You have, however, proved a far more important point - and that is that you are just kidding yourself and others if you believe that you can predict the trajectory of stock prices over the course of a 12 month period.

In my view, that is worth highlighting, especially to those just starting out in stock investing.