Worrying signs of the recession are all around for those who look. Martyn Bradbury wrote last week about how “Kiwis are spending more on their credit cards to keep up with the rising cost of living”
As well, suggesting a repeat of history, the signs are again emerging of third tier lending:
Homeowners at risk of having their properties repossessed by their lender are turning to third-tier finance companies to avert a mortgagee sale, OneRoof has been told.
Mortgage adviser Jonathan Battersby, whose company, SOS Non-Bank, specialises in finding private lending solutions for clients who have been refused finance by the banks, has noticed a big uptick in inquiries from stressed homeowners.
Here’s how it goes:rising interest rates and recessionary forces catch out the over-leveraged who can’t service their mortgages; the banks become more choosey as to who can borrow as credit risks increase; those turned away by the official banks turn to the ‘non-banks’.
In the meantime, depositors at the banks try to protect themselves from inflation but find the return after tax on their term deposits woeful. Clever marketing by finance companies lure Mum and Dad depositors with promises of marginally higher rates that under-play the risks. A finance company gives the investor an IOU which is not itself money in exchange the ownership of their bank deposit.
In the process known as shadow banking, finance companies or ‘non-banks’ then on-lend these deposits at high interest rates to the overleveraged, desperate homeowners.
The numbers of outstanding IOUs held by Mum and Dad investors as well as hard- pressed property developers grow rapidly as shadow banking takes off in a fragile housing market. Inevitably depositors try to get their money back. For a while they can be serviced as finance companies attract new deposits to repay loans. But when the source of new deposits dries up and finance companies have to call in loans, bankruptcy and defaults may rapidly take hold.
Investors discover their IOUs are not real money at all and are next to valueless.
After the last explosion in shadow banking 2006-2012, 67 finance companies went under, with losses for investors of over $3 billion, including the well-known and trusted names of South Canterbury Finance, Hanover Finance and Bridgecorp Holdings
Recall the voiceover of Richard Long at news time on TV even when the company was actually in trouble? “You can’t rely on the weather but you can rely on Hanover Finance.”
Hanover Finance was a New Zealand non-bank finance company that focused on lending for high-risk property development that failed in 2010 under the leadership of Mark Hotchin.
Following this collapse, there were wide changes made to regulations of finance companies. There is now a list of registered finance companies with Reserve Bank oversight. And, it was announced last week, that by 1 March 2025 about 100 registered banks, licensed insurers, and licensed non-bank deposit takers such as credit unions, will need to be licensed by the Financial Markets Authority (FMA)
…the Financial Markets Authority (FMA) –will begin accepting licensing applications for financial institution licenses under the Conduct of Financial Institutions (CoFI) regime….which comes into force on March 31 2025, requires these institutions to put fair treatment at the heart of their business. Each institution must treat consumers fairly – the “fair conduct principle” – through the requirement to establish, maintain and implement a fair conduct programme. They must take all reasonable steps to comply with the programme and with regulations that ban target-based sales incentives and regulate other types of incentives.
Will the ‘fair conduct principle’ in 2025 really prevent another debacle emerging with the shadow banking sector?
Is it fair to say there is not much difference between finance companies & the scams that cause loss to many people? RNZ has an article saying “Around $183 million has gone out of New Zealanders’ accounts over the last year, a 20 percent rise on the year before.” so I suspect the old saying about a fool & their money has some truth. I got burnt about 15 years ago when an email from a friend in Tauranga recommended some site in China for purchasing. After ordering a new laptop I received an email about customs required & the need for more money, I then contacted my friend who told me that they didn’t send me the email.
When the hard times come I suspect that even those with money in real banks (yes that’s me as well) will have trouble accessing it which probably explains the number of people who want to provide more of what they need, gardens, solar panels, etc. The unfortunate reality is that most of the population does not have that ability so interesting times are ahead.
There is a difference between outright fraud and cons and the use of the nonbanks that are now a registered part of our financial system. These non-banks advertise in the daily paper but most people see a higher rate of return and dont read the fine print that nothing is guaranteed. The non-banks may have a useful role to play in niche lending markets but shadow banking at times like this has worked out extremely badly for ordinary folk several times now in our history.
It worked out alright for Mark Hotchin.Apparantly he has a property portfolio of 40million plus.
Surely people learned their lessons from the financial charlatans of Bridgecorp,Nathans,Sth Canterbury,Rifleman,St Lawrence etc.
You should have seen the chaos and social disruption in Argentina when the banks wouldn’t allow depositors and waged and salaried workers access to their funds circa 2002. In an economy where Mr Micawbers economic analysis was an apt description of the dynamics of the Argentinian society, the banks behaviour was a catastrophe.
Shades of Paris 1769
Thanks for your work weaving, piece by piece, a picture of the impossible situation we force the poor to try and survive. There are so many angles and aspects and all are invisible to the comfortable class who so often judge and condemn.
I remember the words of some ad years ago: ”You know the odds – now beat them.” For most the odds are impossible and trying to survive immerses those trying to survive in more layers of a net they will never escape.
The poor are the mattress on which the comfortable sleep.
WINZ and IRD debt are huge problems for low-income people, as is student loan debt. The government has failed to feed back to us any of the results of its latest consultation on this entrapment debt. NGOs once again were sucked into giving so much unpaid time so the highly paid bureaucrats can tick the boxes. It is time for a massive debt forgiveness programme but Labour has dropped the ball. But debt to govt is a bit different to the non-bank for profit lending I am warning about here. We don’t as a nation talk enough about protecting the balance sheets of low and modestly well-off people who get sucked in trying to protect the little they have.
For mine the government had the option of a rent freeze and now has to do something else about those in these cost higher than income scenarios (the credit card overload/pay day loans spiral).
Debt forgiveness is a good term for an overall policy of action – I’d hope to see a realisation it is a time to either establish (WINZ) or lift the income level at which repayment applied. And from that the next step a moratorium year of no repayment required.
“NGOs once again were sucked into giving so much unpaid time so the highly paid bureaucrats can tick the boxes.”
But you can’t say we didn’t consult with all the relevant stakeholders, just because we chose to ignore anything that didn’t fit with our preconceived ideas, can you? That’s how public consultation works.
Gulp
we are all such slow learners
The Labour re-election plan
Those with mortgages will go via the credit card route, the banks will get profit from the high cost of this, then expect their more desperate customers to go to crisis capitalism financiers (banks offload risk while getting the mortgage payments paid – so their books profits look good and no mortgagee sales).
The NACT government re-direction – policies to encourage higher property values, but also more unemployment – so more mortgagee sales (bank mortgages covered by the sale price – any loss just equity of the customer/former owner).
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