Will the banks support the Govt's financial assistance package for leaky home owners?

By Gareth Vaughan

Two months after the Government revealed its long awaited financial assistance package for leaky home owners a key plank to the proposal’s success is yet to be hammered down, - commitment to the plan from the country’s major banks.

The Government needs the banks to lend leaky home owners enough money to carry out repairs or to rebuild, but many home owners don't have enough equity or income to meet the bank's existing lending criteria. The risk is that the Government's plan could be dead on arrival if the banks don't either relax their lending criteria or take on some of the risk themselves.

So just what is going on?

The big four banks aren't talking. Approached for comment they either deferred to the New Zealand Bankers' Association (NZBA) or said discussions were continuing. The discussions referred to are talks with officials from the Department of Building and Housing.

Philip van Dyk, policy adviser and communications manager at the NZBA, also said the talks were ongoing, noting there was "quite a bit" of detail to be worked through and that talks between the Government and local government were quite complex.

However, in a press release on June 1, Building and Construction Minister Maurice Williamson trumpeted that the critical mass of council support needed for the Government's package to go ahead had been received. All eight councils in the most directly affected communities had agreed to support the package in principle and to work with the Government on developing operational details.

And a spokeswoman for Local Government New Zealand (LGNZ) said thus far 45 councils had responded to the package with 28 either supporting it in full or in principle. LGNZ was generally supportive of the package because an unconditional offer of 50% of full costs was better than a mediated, litigated settlement depleted by process cost.

Meanwhile, a spokeswoman for Williamson said there was a lot of complex detail to be worked through with the banks and local authorities, which was why the package was unlikely to be available before early next year.  It was inappropriate to comment further, she said, because the negotiations were on-going. Finally, a spokesman from the Department of Building and Housing would only refer to the department's latest Weathertight E-Newsletter.

The only reference in this to banks is a line saying discussions are underway between the Government and banks about the details of the scheme.

All this after the NZBA notably responded to Williamson’s announcement of the Government’s proposal on May 17 with a brief statement of its own, stating no commitment had been made by its retail bank members - ANZ, ASB, BNZ, HSBC, Kiwibank, National Bank, Rabobank, TSB and Westpac – to the plan.

And speaking to interest.co.nz in May, NZBA chief executive Sarah Mehrtens said her organisation would work with government officials to see whether the banks could commit, given all they knew of the plans was what had been publicly released.

The Government's plans call for it and local authorities to each cough up 25% of agreed repair costs with affected homeowners funding the other half backed by a government loan guarantee. The loan guarantee would be underwritten by the Crown provided applicants could meet bank lending criteria, Williamson said. If, as government officials forecast, 70% of affected homeowners within the 10-year liability limit took up the offer, the Government expected taxpayers’ share of the bill for fixing leaky homes to be about NZ$1 billion over the next five years.

Issues from the banks' perspective could include whether they would be expected to relax lending criteria to financially distressed leaky home owners. This could especially be an issue if owners of damaged homes are in a negative equity position with the value of their loan exceeding the value of their house. And it would be compounded if they needed additional borrowings to fund repairs.

One suggestion is that in some cases the banks might even need to take equity positions in the house to facilitate the necessary repairs being paid for.

A PricewaterhouseCoopers report commissioned by the Government last year estimated between 22,000 and 89,000 homes were leaky. PwC said a consensus forecast suggested 42,000 dwellings were likely to be leaky homes and noted only about 3,500, or 8%, had been repaired. PwC estimated the total cost of fixing 42,000 leaky homes, including repair and transaction costs, at NZ$11.3 billion in 2008 dollar terms.

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