GOING, GOING, GONE

Well, the quote of the week – if not the quote of the year – goes to the head of the ANZ Bank. Mike Smith says ‘These are not happy, happy times’. No shit, Sherlock. They’re certainly not happy times for people with mortgages and high interest rates and high petrol prices and highway robbery at the supermarket.

They’re also not happy times for the banks and their shareholders because the market is punishing them for getting so deeply involved in the American mortgage crisis and not seeing it coming. The banks are writing off billions of dollars in overseas exposure and Smith says it’s going to get worse.

 Home loan defaults will rise. More people will lose their houses. He doesn’t think it will be as bad here as what is happening in the United States and Britain but I’m not so sure.

The IMF – the International Monetary Fund – says the money crisis which started in the US, in the sub-prime market, is now spreading deeper  into other countries. Our banks rely heavily on foreign borrowing. How can Treasurer Wayne Swan be so confident that our economy is bullet proof?

But there is more. I listened to a report out of America on the BBC and  it shows a massive flaw in their banking structure which is costing banks billions of dollars and –like a tar baby – it will stick to our financial institutions.

It’s called ‘walking away’. In California and other states people with huge mortgages and falling house prices have found a legal way out and they’re leaving the banks holding an unwanted baby.

It works like this. I’ll give you a true example. A couple bought an apartment for $500,000 in 2006 during the boom. Paid for it with a 100% mortgage.

Now their property is worth only $300,000 but their repayments have gone up by $600 a month. They decided to walk away. They stopped paying their mortgage. Started saving the money instead for a fresh start. It took the bank eight months to foreclose. The only thing they’ve lost is their credit rating and apparently it is happening so often that that stigma is eroding. It’s being described as ‘a tsunami of defaults’. It could hit the banks for 1000 billion dollars.

And the problem for the banks is that once they get the house or apartment back they legally can’t go after your other assets. Can it happen here? I doubt it. I know from experience the bank can demand other assets and even future earnings. There’s always bankruptcy but I have that old-fashioned idea that somehow that is grubby. And personally shameful.

What has your experience been? Have the banks offered you solutions? Let you re-finance? Extended your mortgage by five years? Or just taken what they could get and left you ? Most importantly how are you weathering this storm? Not easily, I suspect.

Wednesday, July 30 2008

© Copyright Derryn Hinch 2008