The Dim-Post

March 10, 2011

The dependency trap

Filed under: economics — danylmc @ 6:43 pm

Via interest.co.nz:

The government may cover between 15% and 25% of any shortfalls from defaulted bank loans given for the repair of leaky homes under a financial assistance package, with banks then having to take on the remaining risk.

Central government has said it would stump up with 25% of repair costs, while local government would provide another 25% if the respective council signed off consent for the building work. It is expected home owners would then borrow the other 50% or 75% of the costs from a bank.

Here’s an idea for when Labour gets back into power. They could set up a Corporate Welfare Working Group and ask John Minto, Chris Trotter and Keith Locke to look at ways to reducing chronic long-term welfare dependency in our finance, telecommunications and media companies. These organisations really need to be more aspirational for themselves.

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5 Comments »

  1. “discussions between government and the banks hit a sticking point over the issue of who bore the costs of any defaults on the bank loans, with banks so far unwilling to take the full hit themselves”

    Can’t blame them for trying: all sorts of gummints have form for dishing out cash.

    Comment by Clunking Fist — March 10, 2011 @ 7:03 pm

  2. Well, at least they’re fronting at least half of the cost. Which is more than those pesky beneficiaries would ever front up. Damn them.

    There’s a difference, of course, in that this is a carrot for the banks to start lending to people, something they might not do if they had to cover 100% worth of loans for a home. The banks are the parties with the power, whereas the power relationship in the other is quite clearly government dominant.

    And this is only defaulted loans, understand – so there’s an incentive to default, really, or there’s an incentive for the banks to issue loans to people who otherwise would default. This opens up the risk to possibly include bankrupts with leaky homes, individuals struck off from professions, criminals…

    …if you know that you’re going to get $15k of a $30k loan, at least some payments and your default risk is at a minimum, then why not loan to those people? The government will just pay for it, which in the end is cheaper for the government to just agree to pay for it or take on 100% of the risk.

    This is all in theory, of course. The reality is that the banks will still be tighter than a gnat’s chuff with the money, government secured or not, and the government might introduce weird criteria for such loans to make sure they don’t have to pay out too much. So what’ll happen is that the taxpayer will end up underwriting the loans to a high degree, the banks take less of the risk and all of the profit from loans, because God forbid if the interest rates should be lower than a car loan. That just doesn’t make sense.

    Comment by Dizzy — March 10, 2011 @ 7:56 pm

  3. What the banks’ statement makes very clear is that the banks will apply normal lending criteria to any applications to repair qualifying leaky homes, and that the Govt is in no way acting as guarantor of these loans.

    The banks stress this point so that applicants understand there is no Govt sugar daddy to bail them out if they get into trouble.

    This is *not* corporate welfare.. it is the banks making clear that the Govt is not guaranteeing the loans.

    JC

    Comment by JC — March 10, 2011 @ 8:09 pm

  4. Purchaser buys new house for say $400K. Bank lends $380. 5 years later house is a “leaky home” worth $250. Bank security is fucked and homeowner is now a debt slave.

    Both bank & purchaser have claims against idiot govt who signed off the new home in the first place.

    This is a sorting out phase.

    Comment by Simon — March 11, 2011 @ 7:34 am

  5. You can thank the likes of sandra for part of this fiasco (with the lumping of responsibilities which councils are clearly not up to), and alongside her, along with the likes of Carter Holt Harvey, Fletchers, and James Hardie Products, who in collusion with Greenies wanted to rid the building industry of treated timber, who managed to dupe BRANZ and the DBH (r their predecessor at least) into setting standards for buildings so low that leaky houses eventuated. Undoubtably there are some builders who didn’t build professionally, and cut corners, but most were simply following the build instructions of Architects, Engineers and draftsmen who used Code Compliant methods for their designs. So the fault was with the code trying to be adhered to, in most cases.
    The fact that the purchaser is getting shated to the tune of 50% to repair the F-ups is really a slap in the face.

    The solution to all of this is to allow insurance companies to become the risk holders in the building industry rather than general ratepayers. If the insurance companies assess that a building is not acceptable to insure against weather tightness etc then good luck getting mortgage funds to build it. Entire building departments could then be cleaved off councils, and the true cost of building fully met by the people doing the building, and not getting cross subsidisation through other rate payers. The boinus being that 100s of Millions of dollars will be left in the ratepayers pockets. The only bit te council would need to become involved in is the macro-side of the zoning and service supply areas.
    Insurers would provide in house inspectors, working codes, and develop risk profiles for certain house styles, which would engender differing premiums.
    BUT, Alas, we have a system which values bums in seats to the detriment of ratepayers, over results.

    Comment by mort — March 14, 2011 @ 3:50 pm


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