I have just read Banks Are Loaning Too Much to People Who Can’t Pay it Back on News.com.au. Here are some snippets:
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….
“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.”
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.”
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.”
One of the main businesses banks have is lending money to people who want to borrow.
However, I shake my head in disbelief when people willingly borrow money from the bank, put it in a high-risk investment, lose their money, and then turn around and blame the bank for lending them the money in the first place.
Banks don’t want to lose money. They are a business. As such, it makes no sense for them to lend to someone who will not pay them back. They will try their hardest to filter out bad borrowers, but this is an inexact science. You can look at income statements and check creditworthiness, but with so many borrowers on their books, banks can only do so much, and borrowers need to take responsibility for their own actions.
It may be true that 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.” However, it works the other way as well. Borrowers fall over each other trying to borrowing as much money as possible during the good times and now in the bad times they will blame the lender and say it’s their fault for lending all this money.
Debt can be useful if you use the borrowed money to make more money. If you borrow at 4 percent and make 10 percent, you’ve made a good 6 percentage point difference. However, in business and investing, things don’t always go to plan. There is such thing as risk.
This is why debt is like a knife. It can be used for good, but if used poorly it is a dangerous instrument.
A knife can be used to cut vegetables. Eating vegetables is good for your health. However, a knife can be used to cut yourself or cut others. Debt is similar. Debt can help you, but used irresponsibly debt can hurt you.
Suppose I were to buy a knife from a shop. Suppose I then take this knife and stab myself. I go to hospital due to heavy bleeding. Then suppose I blamed the shop for selling me the knife. That is no different to those who borrow from banks and then blame the banks for lending them money when investments turn bad.
I Live Off Dividends 