Irresponsible behaviour by financial institutions

G'day gang

I'm really steaming at the ears over this one, having just read this article in the Canberra Times: www.canberratimes.com.au/news/local/news...1421396.aspx?src=rss .

It discusses the "blow" to the housing market that has just occurred because major banks are restricting the amount they will loan on a homeloan to a maximum of 80% of the valuation of the property. It's about bloody time! While I believe that people should have enough sense to realise that if they can't afford to save enough for a significant deposit, or if they aren't disciplined enough, then they can't afford to make the payments on the mortgage, it is obvious from the US sub prime mortgage crisis and many foreclosures in Australia that sense is not always a common commodity. When I think back to the time when I first purchased a residence, it was not allowed for anyone to borrow any more than 66% of the value of the property. If you consider how expensive a property is today, perhaps that's not such a bad rule to follow.

I firmly believe that there is a need for some degree of responsibility to be taken by financial institutions in the economy. I would also like to think that there is some degree of guilt felt in the higher echelons of the financial institutions for the unfortunate and foolish people who have overextended themselves with the encouragement of said institutions. However, that is quite unlikely. Perhaps they are setting people up to fail so that the financial institutions can increase their assets. It is more likely that there is a pouting of lips in the reduction of income caused by the current economic downturn.

As an Australian, I think it would be wonderful if the Australian government took a step to tighten the rules to a degree to protect the naive and greedy from the totally greedy. I don't believe in the free market economy espoused by the ultra conservative US elements, or indeed, the ultra conservative Australian elements as espoused by our former Prime Minister John Howard. However, I also believe that over regulation has its own disadvantages and dangers. There is a need for balancing protection for the public against the freedom we believe in.

How we can attain a balance of regulation against freedom is something I am unable to comment further on because I don't know enough about economics to make informed comment. All I know is, it's about time some fiscal responsibility happened somewhere.

Cheers
Mem

Hi, Mem'

I agree with everything you've written here. The trick, of course, is to find the right "balance". It's one of those things where not everybody is gonna be entirely happy, whatever the lawmakers decide to do or not do.

Again an interesting subject, and I agree with what has been said.

Once upon a time, repayments could be no more than a third of the household income, and you had to have a MINIMUM of 10% deposit, usually much more. These days it seems, you can totally finance a housing loan at times up to 100%, when you add the interest you find, for at least the first five years often 10 you owned equity in the house is close to zero.

BUT with the price of rents, it is often cheaper to fully finance the purchase of a house/unit than to rent a property, there in lies the problem. With rentals being in such high demand, with the rents being charged spiralling upwards, how can a person/couple save the a deposit? I guess thats why so many children choose to stay at home for the length of time they do?

I suspect that a lot of the problems we have with mortgagees going "bust" (because they recklessly bought into a home before they had the financial basis to service the debt) are:

• partly due to the negligence of institutional money-lenders who fail to protect their clients from likely ruin - as much as their actions are also motivated from pure greed; and
• the consequences of the I-must-have-it-now "generation".

Well, heck, I'd like to own it "now" too but I'm a realist; I think it's more fun to dream about owning a Porsche than spend the rest of my life worrying how I'm going to pay for it.

However, one wonders whether the I-must-have-it-now generation even frets about the future at all?

I think it’s the combination of all parties that has caused the problems in the housing industry. If one considers that the developer builds homes to make a profit and their greed makes them offer houses well above the average price in the area i.e. Cherrybrook homes were put up for sale at $7-800,000, when at the time the average price for a similar house was around $600k. Or the bank for being proactive in their approvals for mortgages of 500K + taking advantages of clever adverts appealing to the Australian dream of owning their own home. Or the over zealous people that thought they could borrow 500k + and pay it off over 30 years with an annual combined income of 100k.

The banks in their insatiable appetite for the almighty Dollar and big profits on the backs of working Australians have devised financial plans. These plans include bankcards tied in with mortgage payments and the clients wages where in ideal times of continuing low interest rates a family could move into their overpriced homes and have their 2 cars plus everything that opens and shuts allowing them to live in luxury they can ill afford.
What they don’t tell them is that bankcard debt can see them in the wrong side of bankruptcy as the absorbent interest rates on bankcards actually eat away at their cashflow causing the bankcard being maxed out and the finance companies chasing the debt.

The banks are not worried because part of their loan approvals is a mortgage insurance that pays the bank the mortgage in case of default.
Perhaps the solution is for the federal and state governments to finance a public department to provide financial advisors for all prospective mortgagees. The federal govt to introduce a mandatory 1 day course for all would be home owners that are entitled to the first home buyers grant.

I agree with what you wrote, ezy, and some of your ideas (particularly the one about compulsorily requiring that first-home buyers attend a seminar on how to manage their finances!!) are really good! :up: However, while I agree that an awful lot of the fault rests with the naïveté, cluelessness, inability or sheer incompetence of people in managing their own finances, I think the point that memsahib was trying to make is that financial institutions must shoulder a lot of the responsibility - and the blame - for the current mess that people and world economies now find themselves in.

Yes, yes, yes! I love your idea of a course for those getting the first homebuyers grant. Let's go one step further, and have a levy on the banks to fund the course!

Financial advisers are also a great idea, although the quality of financial advisers varies hugely, and the better ones tend to get snapped up by the larger companies, or make a lot of money setting up their own companies (good luck to them as long as they don't take advantage of others).

I also have a big problem with banks providing owner-builders with platinum credit cards. I've seen some people get into awful strife over that one! In fact, credit cards are part of the overall problem, as they are so easy to get, even when you have a rotten credit record.

Part of the situation has arisen because people rarely see much in the way of real cash today. It's too easy to carry out an electronic transaction without thinking about the consequences.

All my points lead back to the greed of financial institutions, and the ease with which they are able to mislead gullible people into borrowing and spending way beyond their means. I'm not only blaming the financial institutions - it's all really part of a systemic problem with the free market economy. However, I don't know of any system that is better, unfortunately. We do need regulations to balance our freedom so as to protect the amazing number of naive and foolish people out there.

I haven't time to add to this at the moment, but will ponder further and come back to it tomorrow night. Thanks for the ideas everyone. This is getting to be a very interesting discussion.

cheers
Memsahib

Hi folks. I know I promised more tonight, but I'm too tired from work! Sorry. CU tomorrow instead.

Mem

Although this doesn't quite fall into the category of irresponsible behaviour by financial institutions - in terms of their contribution to the economic mess that the world is currently in - have a read of this opinion piece from The New York Times (as reproduced in The Canberra Times ) and see if your blood doesn't boil! :pinch:

If it makes you feel any better, Sozz, I saw the Prez on the ABC news last night and he threw the gauntlet down at the bankers...if they want any govt bailout money from his govt, they are gonna have to spend it the way he wants them to.

I think that's only fair. I signed a contract for a bank loan many years ago and it stipulated that I had to spend the money only on that which the bank approved of. I defy anybody to apply for a business loan from any bank then take that money and buy a Ferrari with it. See if the bank doesn't bring down its unholy wrath upon you. Why should the rules be any different just because they're a multi-million dollar corporation?