James Ayers looks at the housing mortgage crisis in the United States and warns that New Zealand could soon be facing a financial crisis.
As most readers will be aware, the international financial markets have been rather jittery over the past few months. In New Zealand this has been reflected by Kiwis abandoning finance companies in favour of perceived safer havens, namely deposits in commercial banks. But they are not necessarily safer - more on that later.
The international jitters originated from problems in the United States housing market, and in particular the sub-prime mortgage market in which Countrywide Financial Corporation is the largest provider.
Since Countrywide first admitted an increasing number of its mortgage loans were defaulting, a contagion spread quickly into other mortgage providers, and into the various funds which had invested in these mortgages - not just in the US but throughout the world.
Within weeks, central banks in the main financial centres had to cough up hundreds of billions of dollars to stop the financial markets going into full meltdown. And of course these billions were just book entries, i.e. created out of thin air.
Countrywide had been a very profitable company, exploiting people desperate to buy a home. They had a range of mortgage products for just about anyone, as long as the borrower was willing to commit to exorbitant fees and penalty interest rates.
The borrower didn't have to put down a deposit, or borrow 95 percent and did not have to provide any documentation of his or her income. The borrower could have filed for personal bankruptcy, or faced foreclosure notices on a property and Countrywide would still lend to them!
And according to Countrywide's own manual, a loan to a single borrower could be made, even if the person had just $550 to live on each month.
In return for being so 'generous', Countrywide would charge all sorts of fees.
A prepayment penalty could be the equivalent of six months worth of interest at three percentage points higher than the prevailing market rate.
Late charges generated $268 million for Countrywide last year.
When borrowers closed their loans, fees were charged for flood and tax certification, appraisals, document preparation and even e-mailing, at rates typically double their competitors. This sounds similar to excessive fees the Australian-owned banks charge Kiwis, helping then make some $3 bilion in profits in a country of just four million people.
And, of course, this greed isn't limited to Countrywide as the company needed a source of funds to lend as mortgages. Investors lined up to buy securites backed by Countrywide sub-prime mortgages because of the higher cashflows from prepayment penalties and interest rates resetting at higher levels. These securites were often packaged as collateralised debt obligations or CDO's, essentially a mix of prime and sub-prime loans. And it was this combination of Wall Street ingenuity and greed that has put the world financial markets at risk.
Here in New Zealand, commentators are quick to point out that we don't have the same sub-prime problems.
Perhaps not yet, but it will happen.
Over the past few years, banks in Aotearoa have been gradually relaxing their lending criteria so they can lend larger and larger amounts to the average Kiwi - not just with mortgages but with all their lending products, especially credit cards. How many of us have received unsolicited increases in our credit card limits without the bank asking for updated information on our income level? They don't want to know, they just want you to borrow more and more, so they can meet their ever-increasing growth and profit targets.
With household debt at record levels, higher interest rates and the cost of home affordability doubling in the past five years, many Kiwis are struggling to keep themselves afloat. Throw in a rapidly cooling and soon to be falling property market, and you will soon see mortgage repayments fall behind. The banks will start to look as jittery as some of the finance companies that have made the news in recent months.
In fact, as it stands at present under the fractional reserve banking system, the main banks have less capability (as a percentage of their total assets) than the perceived more dodgy finance companies to pay cash out to their depositors should those depositors want their money back. YOU HAVE BEEN WARNED!
James Ayers radio show, The Corporate Nemesis, can be heard on Plains FM, 96.9 Christchurch, every Tuesday at 11am.