Banks are loaning too much to people who can’t pay it back
A WOMAN is staring down the bankruptcy barrel at just 24 and she’s not the only one.
An explosive 60 Minutes investigation, which airs on Channel 9 on Sunday, has discovered banks are irresponsibly loaning large amounts of money to people who just can’t pay it back due to a collapse in the property market.
The 24-year-old, who was an ordinary income earner, was loaned $6.5 million by a bank and encouraged to invest in a “highly volatile” market in the little mining town of Moranbah in Queensland — she bought 10 properties.
She has now obtained documents from the bank that loaned her the money, which show they knew there was a medium to high risk of the values collapsing and her homes being left abandoned by potential renters.
Reporter Ross Coulthart said he thought the case was an isolated incident, until he delved deeper and discovered this was what banks were doing in remote communities in Queensland, Western Australia and the Northern Territory.
“It raises a question mark about the rationality of lending practises and why thousands of investors are looking at bankruptcy because they can’t get tenants into their investment apartments or residential homes,” Mr Coulthart told news.com.au.
“The investors bought their properties during a peak in the market, some were $600,000 or $700,000 for ordinary buildings, but now some are worth just $100,000.”
A woman was loaned $6.5 million to buy 10 properties in Moranbah. Source: 60 Minutes
Renowned investment expert Jonathan Tepper, who has predicted mortgage bubble bursts in both Ireland and the United States, told Mr Coulthart Australia would be next.
Mr Tepper believes property values will plummet by 30 to 50 per cent, leaving investors with incredibly high loans to pay back and a lack of return from their investments.
Mr Tepper told 60 Minutes he had gone undercover to see how willing banks and brokers are to loan obscene amounts of money to people with average incomes.
The expert pretended to be somebody with a yearly income of $110,000 and spoke to property moguls developing multi-million dollar apartments.
He was offered assistance to buy a million-dollar apartment on 95 per cent borrowings.
“When he asked property developers about how he was going to get a loan, they boasted about having someone on the inside that could help get the money,” Mr Coulthart said.
“That shows through Australian lending practises, especially through brokers, there’s a lot of improper behaviour going on, and in some cases there are claims of pay slips being forged.”
Mr Tepper told Mr Coulthart Australia is already seeing signs of the mortgage bubble burst and he thinks property in the country is ridiculously overvalued.
Mr Coulthart said people with an average income who wanted to buy an investment property
had to borrow 10 and 20 times their gross income.
“That is a preposterous amount of lending,” he said. “Property values in Australia are out of control and the level of mortgage debt in Australia is something like 3.8 times the gross domestic product.”
Mr Tepper said the mortgage bubble burst was a disaster waiting to happen, and while he doesn’t know when Australia will suffer from this, he thinks it is imminent within the next year.
People are paying high prices for ordinary houses. Source: 60 Minutes
He questioned why people are being encouraged to borrow 10 to 20 times their gross income.
“It’s an unsustainable level of borrowing,” he said.
The 24-year-old featured in the 60 Minutes report doesn’t entirely blame the bank for the millions she borrowed, admitting to being greedy.
But she said while she didn’t look closely enough at her capacity to repay the loan, she believes the banks also had a duty of care.
“What this has taught her is banks are throwing money at people in the good times and now in the bad times banks will blame the borrower and say it’s their fault for borrowing all this money,” Mr Coulthart said.
“To some degree that’s true, but they should have a duty of care to make sure people have the capacity to repay.”
The documents the 24-year-old got her hands on in relation to her loan show the bank knew her investment was risky.
“So it doesn’t make a great deal of sense why the bank loaned this money,” Mr Coulthart said.
“The woman’s point is, yes she accepts some of the responsibility, but believes the bank has to acknowledge it made a mistake loaning the money.”
Many are sent bankrupt because they can’t afford repayments. Source: 60 Minutes
The 60 Minutes investigation also tells the story of couple Simone and Shane James, who are $2.3 million in debt.
They invested in apartments in a remote mining town, which they can’t fill with tenants.
When applying for the loan, they put down their family home as security, and now they have to sell up and declare bankruptcy.
“They are shattered,” Mr Coulthart said. “They freely admit they made a terrible mistake.”
The reporter said the couple knew this would make them the subject of public ridicule, but believed it was more important for other people to be aware of the lending practises.
“They think there was a mistake made in lending the money,” Mr Coulthart said. “They are not blaming the bank entirely but there needs to be a debate that banks, despite what they are saying, are not in fact following due diligence or normal lending practises.”
The 60 Minutes report reveals people are borrowing 95 or sometimes 100 per cent of the cost of their investments.
A lack of tenants and a struggle with repayments mean it’s resulting in multi-million dollar white elephants in Australia’s mining towns.
See the full report on 60 Minutes, 8.15pm Sunday night, Channel 9.