Tuesday, 24 November 2009

mortgagee sales

mortgagee sales are at an all time high:

There were 343 mortgagee sales in September, a 130% jump from the 149 such sales in September 2008, according to Terralink International. In September 2007, before the recession started to bite, there were just 16 foreclosures.

“We’re likely to see mortgagee sales continue well into 2010,” said Phillip Borken, economist at ANZ National Bank. A struggling labour market and a steady increase in household debt are “key economic drivers behind the increase in forced sales.”

i heard a story today of a home that had been put up for a mortgagee sale. the people who were losing their home ended up taking out every single fitting they could get their hands on, including switches, fixed appliances, sink tops in the bathroom, in-built speakers. basically they gutted the house as well as they could and spoiled much of what was left.

i can't say that i approve of the destruction as such, but i do have a hard time finding any sympathy for the banks. what our friend from the anz national bank doesn't tell us is that banks were pushing loans on to people, forcing staff to meet targets of increased lending to consumers. these consumers were lead to believe that property was a sure thing, that capital gains were absolutely inevitable and that there was little risk involved.

they were also presented with the added incentive of tax losses that could be offset against other taxable income. under these conditions, i've seen plenty of people who are now seriously losing money on rental properties that were never a viable investment. even if they can keep up the interest payments, it's going to be a very long time before the capital gains will equal the amount they've paid out in interest.

as for the tax deductibility, you pay out $100 in interest, you get $39 back (assuming you're at the highest tax rate). that still means you've lost $61 dollars, and more if you're at a lower tax rate. the point is that property ownership is nowhere near risk-free, and particularly not when you're borrowing 100% of the purchase price.

many of the banks' customers certainly didn't have the background knowledge to be wary about this kind of thing. but the banks do have that kind of knowledge, and they failed to protect their customers or to follow sound practices. if they lose money on mortgagee sales now, in most cases it's pretty well deserved. it's just a pity that the people who took out the loans are also losing substantially as well.

as it is, it looks like the banks are still making plenty of money:

Household debt peaked at over 160% of households’ disposable income in 2008, nearly three times the level of December 1990, according to central bank figures. Debt currently stands at 152% of income, based on the latest quarterly figures.

which means that an awful lot of people are paying an awful lot of interest.

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