Energy Efficiency

In previous articles I’ve mentioned the banks profit making tactics in the CBD and then residential markets; complicit by lending money for over-priced properties.

I also believe that even though we are at record low interest rates, eventually we will see a property price correction that will address the inflationary excess of the credit boom; that the banks lending practices assisted in pumped up prices so much in the first place.

Some twenty years of a credit boom and over-priced shares changing hands has seen major investment in residential property – encouraged by the government no less –which has put home-ownership out of the reach of many and lending practices that now – with the economic downturn – will put hundreds of thousands of people into debt they can’t repay.

Paper profits will disappear, and as more house must be sold and less people able to purchase these properties, property values will drop.

I read elsewhere that a mortgage moratorium applies only to the Big Four and their customers; however, this is wrong, all borrowers who have ‘coded loans’ are protected by the Uniform Consumer Credit Code.

The big problem is that many self-employed people who didn’t qualify for ‘coded loans’ are not offered the same protection of either having their loan term extended, reduced repayments, or suspended for a period of time.

The yet-to-be- revealed equally exposed pay-as-you-go 9-5ers have also – in many cases – opted for the loan – where their home is primary security for an uncoded loan. To prevent the Big Four banks from controlling the market, the government is directing funds to be made available to the ‘secondary mortgage market’; in other words, the smaller lenders who have been and are keeping the banks honest.

Now extending the term of a loan or postponing or reducing repayments actually may sound appealing, but if the terms of the loan allow a higher rate to be charged for late payments (part of every loan contract) then your loan will grow, not mark time, let alone go down. A $200,000 loan over 25 years would have a monthly repayment of $1,491; therefore after 5 years you will have paid the bank $89,470 but the amortized amount still owing is $164,640. Of the $89,470 paid, the actual debt has been reduced by $35,360; which means $54,110 or quarter of the loan amount was pure profit for the bank.

A loan with postponed repayments for 12 months would grow by about $10,700 at 6.5%, if the rate for late payment is higher, then the banks profit position is enhanced.  The RAMS, Aussie Home Loans and Mortgage Choice actually write a lot of business for the banks and many ‘secondary mortgage lenders’ (like Mortgage Choice and Homeside as but two example) are owned by banks.

It is interesting to see how the banks have successfully pulled in the various governments around the world to protect and even underwrite them (Westpac nearly went under in the late ‘80s due to questionable practices in property trusts and ran to the government for protection, from their greedy mistakes). The toxic asset problem (caused by reformatting and repackaging and on-selling packages of questionable loans) seemed to be sorted; in America, the Dow Jones Index had its best four-week performance since 1933 and the Australian Stock Exchange rose almost 20% in the three weeks.  So what changed, have the chickens all come home to roost, the banks hit bottom and bouncing back?

No, the only thing that changed was one rule; the Financial Accounting Standards Board (FASB) in the USA suspended its rule number 157-e; where the banks must value their assets using a mark-to-market method; where banks had to revise the value of their balance sheet assets based on the current market price for assets.

Of course the banking fraternity complained that the rule distorted the price of assets for which there is no current market; that in the long term – ‘over a period of time’ – the maturity value of the assets was still intact.

And why not, superannuation fund managers have long used ‘the long term view’ to cajole people to keep contributing even though returns are low and administration costs and remunerations are disproportionately high.

Argentina was an economic powerhouse … until the Americans ‘came to help’; not long after the Argentinean economy collapsed, bankers stole money from people’s bank accounts, the Argentinean government pegged the peso to the US$ and – by ‘stealth’ – effectively stole the then ‘world currency’ (the US$) banked by their countrymen and replaced it with worthless pesos; Argentina has not and never will recover.

This same exercise has been worked around the world, the IMF (International Monetary Fund) and the World Bank (as toadies of America) has systematically stripped countries of their wealth and now it’s ‘our turn’. By this I mean, this well organised theft is now happening to us in the ‘civilised world’ .

Apart from selling packages of what has proved largely toxic loans, in the back ground people have also been selling gold, but not necessarily real gold, but sort of like promissory notes for real gold, deliverable ‘on demand’. To stimulate the gold market, bearish gold commentators claimed there was a shortage of both gold and silver.

The NYSE (New York Stock Exchange) sold these gold type promissory notes, however, perhaps many people invested in shares where they had call options, or due to down-turns in their business, needed to cash up, but whatever, there is now so much demand for delivery of the mini future contracts; if you had bought a mini futures contract from an NYSE-Liffe clearing member prior to December 31st you could bind them to their legal contract with you and force them to either deliver the 1 kg bar or pay for you to obtain it on the open spot market.

Unable to deliver, they had the wording changed and similar to California (now paying in State Government IOU’s), these ‘reputable members’ of the NYSE are now allowed to hand out little slips of paper which are called ‘warehouse depository receipts’ (WDR for short) that are being substituted for ‘vault receipts’ (VR). The WDR’s, in contrast to the VRs, merely promise the customer that he owns a 1/3 interest in a 100 ounce bar; the customer is not allowed to take delivery, unless he can accumulate 3 WDR’s, which now equals 1 VR.  And so begins the NYSE now defaulting on key gold futures contracts.

The next step will most likely be that the government may put a freeze on the delivery of gold (at the behest of the gold sellers) or that there is a shortage of 100 ounce bars and to ‘cash them in’ in you need – say – 500 ounces.  Apparently there are a vast number of 100 ounce bars stored at the iShares COMEX gold trust (IAU), so, a default in delivery of 100 ounce bars may take a while unless another hurdle is placed in the way of the legitimate owners, like exchanging crisp new US$ notes instead of the gold. One wag suggested that the final step may be certificates be signed over along with picks and shovels?

On the property side of things, First Home Owners can not keep coming out of the woodwork indefinitely and those who invested in property may need to sell to reduce commitments in a slower economic climate; as there are less buyers, the prices will come down.

Indirectly, it was the American consumer / over-spender that helped us sell so many resources, but as work opportunities shrink, unemployment in the USA has hit a 25-year high, this will mean even more defaults and foreclosures; Australia’s two largest trading partners Japan and China are in forced wind down mode and as there is less income from overseas markets, Australia is looking at unemployment levels around 10% if not this year, then most assuredly in 2010.

Rising unemployment of both home buyers as well as renters translates into less purchasers, this will impact on the Australian property market as people are less able to service monthly repayments or rents. Putting loan repayments on hold for 12 months merely puts off the inevitable and if property values drop lower, the potential loss will be even greater for those who wait a year.

The last thing Captain kRudd wants is for property values to crash on his watch, so he will support the banking industry that indirectly helps keep the pack of cards stack in place. The bank would rather keep people in their home, with people still under impression they still own it; this keeps the profits coming in and they don’t have to board up homes or pay up-keep which they would have to do, when taking possession. Bank executives need to keep the pretence going as well, otherwise share holders will call for their head and bonuses become more difficult to claim.

So what would be the best option? Let the banks go under because we have less invested in them – due to their continued lending practices – than they do in us.  Property prices will stabilise to a more affordable price, home ownership will go up, more stable communities means lower Police numbers and less stress…. So leave as little money in the bank as possible and c’mon the crash; remember its only paper money …