Banks should tailor lending products for leaky home owners, HOBANZ says

Bankers need to get out of their Queen Street offices and tailor lending products to the specific needs of leaky home owners or face waves of them handing over the keys to their rotting houses, the Home Owners & Buyers Association (HOBANZ) says.

John Gray, president of the HOBANZ, told interest.co.nz that the banks were in an “invidious position” as their representatives’ talk to government officials about the government’s financial assistance proposal for leaky home owners.

Building and Construction Minister Maurice Williamson announced the plan on May 17. It calls for the central government and local authorities to each cough up 25% of agreed repair costs. Leaky homeowners themselves would fund the other half backed by a government loan guarantee where necessary. The loan guarantee would be underwritten by the Crown provided applicants could meet bank lending criteria, Williamson said.

Gray points out that means the home owners have to somehow find the money to cover half the repair bill. In most cases they’ll need a loan but will struggle to meet standard bank lending criteria. And, in many cases, the gearing on their homes is already high given their equity has been absorbed by the fall in the house’s value due to leaky problems.

“Effectively people have to put their hand out, in some cases to effectively double the size of their mortgage and the banks are saying ‘we can’t sustain that, it’s too much of a risk’,” said Gray.

Bank representatives, under the umbrella of the New Zealand Bankers' Association (NZBA), are in discussions about the proposal with officials from the Department of Building and Housing. The government wants to have the package available to leaky home owners by early next year.

Charles Pink, ASB chief executive and NZBA chairman, told interest.co.nz  last week the banks were looking at the government proposal in "considerable detail." It was a "complex and very important proposal" and the banking industry was working through details of it. But Pink couldn't put a timeframe on when it the NZBA group might reach a decision on whether to support the plan. The NZBA's members include ANZ, ASB, BNZ, HSBC, Kiwibank, the National Bank, Rabobank, TSB and Westpac.

A customer's problem is their bank's problem

Gray said HOBANZ understood there was a disconnect in the talks between the bankers and government officials over what the banks’ consider to be a guarantee and what the government wants the guarantee they will provide to be. In terms of the position the banks are in, Gray said it was a very “invidious” position. That said, they didn’t really seem to have an understanding of the size of the problem and how it actually affects the value of their mortgage books.

“Because in our view it looks pretty sick if we were to believe the PricewaterhouseCoopers report in terms of 89,000 homes affected and some experts saying its upwards of 200,000,” said Gray.

“The banks need to wake up to the fact their customers’ problem is bound to inevitably become their problem. So they need to perhaps take a more innovative look at how they might get involved and ease the pain.”

He provided an example of a young lady in Christchurch, a sickness beneficiary, with a NZ$50,000 mortgage facing a potential NZ$100,000 repair bill for her share of a body corporate rebuild. Gray said she no ability to borrow any more money, let alone service any borrowings if they were provided.

“She’ll turn to the banks and the banks will undoubtedly say ‘no thank you very much’,” said Gray.

“They (bankers) have to simply recognize the risk that exists where people will simply just be handing the keys back and that’s a very sad, sad situation,” he added.

“The banks need to come out of their Queen Street offices to actually have a look at what’s going on at the coal face and get an understanding of the problem and try very hard to make some lending products available tailored to these specific needs.”

Despite the problems Gray said he did expect the government’s rescue package to meet its target of being in place by early next year, if just to save face. He expected uptake of it to be low. That’s because most of the people confident of their leaky home claims don’t see why they should merely accept 50% compensation. They can “beg, borrow or steal” to fund their repairs, make their claim against their local council, and after coughing up fees for lawyers and experts, still recoup between 75% and 85% of their costs.

“It (the government proposal) just doesn’t make economic sense,” said Gray.

But if, as government officials forecast, 70% of affected homeowners within a 10-year liability limit take up its offer, the government expects taxpayers’ share of the bill for fixing leaky homes to be about NZ$1 billion over the next five years. This means the banks face stumping up billions of dollars in loans and/or equity to break the logjam stopping leaky homeowners from repairing or rebuilding their houses.

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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