Debtland Program Transcript
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45’ 11’’
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Reporter: Stephen Long
Date: 31/03/2008
STEPHEN LONG: In a bathroom in their home in Sydney's north-west, a mother and her two children are cleaning against the clock.
DIANNE DAVIES: We've got two days to get out and have this house clean and tidy and get out. And I've got nowhere to go. So we're not sure, not sure what to do.
STEPHEN LONG: They're among the tens of thousands of families in Australia being dragged under by unsustainable debt.
DIANNE DAVIES: It's really scary, really scary and nervy. And it's just ludicrous, it's, there's nothing there to help, nothing at all.
STEPHEN LONG: Before this story is over, they'll find themselves living in a garage; the house they cherished sold out from under them.
It's lending on a scale we've never seen before - over the top mortgages that'll push you into poverty, punitive interest on multiple credit cards, over the horizon interest free deals.
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: The Banks are just handing out money on credit cards like there is no tomorrow. For me it's quite terrifying to think that the average household in Australia, so the average, now has three months of their monthly disposable income on a credit card balance.
KIM WHITE, FORMER NAB EMPLOYEE: I up-sold someone to $80,000 on more than one occasion when they only came in for a $20,000 or $30,000 loan and it was my job to basically talk that person into taking the extra money.
STEPHEN LONG: As interest rates bite and the global economy turns, tonight "Four Corners" takes you deep into Debtland, a scary place built on easy money.
STEPHEN LONG (to Dianne Davies): Why did you keep on taking out the loans?
DIANNE DAVIES: Because they keep giving it to us.
(On screen text: "DEBTLAND"; "Reporter: Stephen Long")
(Footage of street signs showing intersection of Herald Place and Borrowdale Way)
STEPHEN LONG: Our journey starts here - Kellyville, in Sydney's McMansion belt. Big homes, modest blocks, big mortgages. It's been a losing formula for this family.
DIANNE DAVIES (to girls on bicycles, coming up the driveway): Come on, you've had a break, come on. You're doing so well helping me.
STEPHEN LONG: Dianne Davies and her husband Kevin bought the house seven years ago with a mortgage from St George Bank. He works as a contractor laying floors and he was earning good money, but the work took its toll.
DIANNE DAVIES: He was worried and he worked and worked, and worked 'til he dropped. And now they're just going to take everything that we've worked our guts out for, to be honest.
STEPHEN LONG: A combination of industrial illness, bad luck, bad management and rising rates pushed them into default. They refinanced with second tier predatory lenders and found themselves being shuffled from loan to loan at ever rising rates.
By the end they had two mortgages: one at 10 per cent interest, a second mortgage at 20 per cent, on terms they didn't understand.
DIANNE DAVIES: A lot of people don't know really what they're signing and what they're doing because they don't tell you. They tell you only what you like to hear: "Yes we can save your house, we can get you this loan." And all you want to do is make sure you have a home and a roof over your head. And that's your thoughts at that time when you're signing. You think, okay, well maybe if I get another loan that'll give me time to sell or maybe do it up or do something, you know, or the market might get better.
STEPHEN LONG: By the end nearly all their money was going to the lenders with mortgage payments of more than $5000 a month.
DIANNE DAVIES: A ridiculous amount of money, and the kids had to have time off school, like three and four days, and then sometimes the next week because I couldn't feed them for school. That's how bad it was.
STEPHEN LONG (to Dianne Davies): So you had to keep them out of school because you just had nothing to give them to take for little lunch and lunch?
DIANNE DAVIES: That's right. I didn't have bread, I didn't have butter, I didn't have anything. And we just had no money. We've just put as much as we can to keep our house.
STEPHEN LONG: All in vain. Now it's crunch-time. If they're not out by the weekend, the bailiffs will turf them out and change the locks.
DIANNE DAVIES (to Kevin): I mean if we go to a shelter have they got their own beds? I don't know anything.
KEVIN (to Dianne): Well you'll need to ring up.
STEPHEN LONG: The rental market's tight, and with two kids, a dog and a bad credit history they haven't been able to find anywhere to go.
DIANNE DAVIES: Oh it's a nightmare, it's a nightmare.
KEVIN: We've just got to hook in, get it done, and ...
DIANNE DAVIES: Hope.
KEVIN: Pray.
DIANNE DAVIES: Righto kids, that's your job, go and pray (laughs). Go pray and tell God we need this house. We need something happy or good to happen. One thing, just one, even.
What do you reckon Charlie, you going to pray to God for us?
CHILD: Yes. Our father who art in heaven, hallowed by I name...
CHILD 2: Thy name.
DIANNE DAVIES: Well she's close.
CHILD: Thy kingdom come, thy will be done...
CHILDREN (in unison): On earth as it is in heaven. Give us this day our daily bread ...
(Excerpt from financial counsellors' meeting):
MAN: ... And I think we've got to acknowledge that, that that's actually written down on their applications.
MAN 2: That is written there but people trust banks, people trust banks that if the bank says, "We'll lend you $180,000" then I must be able to afford it.
WOMAN: For full time ...
(End of excerpt)
STEPHEN LONG: A thousand kilometres south of Kellyville, the stories of financial pain and suffering are just as harrowing)
(Excerpt continued):
MAN: I had a young guy come to me that had five personal loans, one with the ANZ, one with Commonwealth, one with St George, two with ...
(End of excerpt)
STEPHEN LONG: These are the people who deal with the credit casualties.
(Excerpt continued):
MAN: ...A total of $104,000 worth of debt. He was on an income of 48, his income's now down to 36. He's got a wife and four kids and we went bankrupt.
(End of excerpt)
STEPHEN LONG: Here in the heart of Melbourne, financial counsellors from across Victoria share intelligence and swap stories.
(Excerpt continued):
WOMAN: And she contacted them and said, "But I only want $500, I never applied for $2,000." And they said no, no, you know, this is what we want to give you, we want to give you, (laughter) we want to give you the $2,000.
(End of excerpt)
GARRY ROTHMAN, UNITING CARE, BROADMEADOWS: So come and have a look at these files Stephen - you might call it the roll call of horror.
STEPHEN LONG: Demand has become so overwhelming, counsellors like Garry Rothman have been forced to introduce triage systems, like hospital emergency rooms. And they can only get to the worst cases of financial trauma.
GARRY ROTHMAN, UNITING CARE, BROADMEADOWS: Here I have a client with $69,500 worth of unsecured debts, all with Commonwealth Bank, NAB, GE, Westpac, and another ...
The level of debt is exploding to a level that's going to cause a crisis in our community. People are able to access multiple credit cards, multiple loans, multiple - and we're not talking about fringe lenders here. We're talking about mainstream lenders, we're talking about the banks.
KIM WHITE, FORMER NAB EMPLOYEE: The pressure was, sell them, sell them the, if the system will let them do it, sell them as much as you can possibly sell them.
STEPHEN LONG: Kim White worked for the National Australia Bank for five years, mostly as a personal lender selling loans and credit cards.
He's an enthusiast for old-style motorcycles, and after his time as a debt pusher, he's now an enthusiast for old-style banking before it was just sell, sell, sell.
KIM WHITE, FORMER NAB EMPLOYEE: We would see people come through and we'd estimate how much it cost to lend them all their payments, everything else like that. At the end of the month they'd have $100 left over, but sometimes the system would still say, lend them the money and that person is living on a razor edge.
And you know that they're not going to be able to afford it. They're going to live on their credit card for their basic living expenses and get themselves into worse debt. But the system would say do it, the bank would say do it or else you're going to be under the gun, you're going to be performance managed out. So we're in the situation where we lent to whoever we could and as much money as they wanted.
STEPHEN LONG: And if Kim White wouldn't rev up the credit limits, someone else would.
KIM WHITE, FORMER NAB EMPLOYEE: I would say, "I'm chopping your card limit to $500. There's no option on that. You know, take a $500 card so you don't get into trouble."
"Yeah, sure! Great!"
And then when they came back later on you'd say, "Why is your credit card $5000 now and why have you maxed it out when I had it paid off for you last time?"
They'd say, "Oh the NAB credit card people sent me a pre-approval (laughs) for $5000. I just signed it and sent it back.”
STEPHEN LONG: NAB wouldn't give an interview but defended its practices in a written statement saying it had "Strict credit polices, processes and controls..."
STEPHEN LONG (to Kim White): So how many people do you think took money that they really couldn't afford?
KIM WHITE, FORMER NAB EMPLOYEE: Oh, more than my conscience would like to acknowledge. I'd, I'd say 20 per cent of the people that that I sold loans to I really wouldn't have given them a loan but the system said yes, lend them the money, and we did.
The sales effort doesn't get much worse than a spate of loans that "Four Corners" has uncovered - loans made by a major bank that targeted refugees in Melbourne.
DENG GATLUAK: When I came in Australia I don't know anything about English, but when we went to the bank the one of bank fill me the form and I will sign it.
STEPHEN LONG: Deng Gatluak and his family fled to Melbourne from war torn Sudan. A refugee with no English, no job, and no concept of finance - yet the Commonwealth Bank gave him a $20,000 car loan. The repayments left this large family with next to nothing to live on.
LAUREN WALKER, SOLICITOR, CONSUMER ACTION LAW CENTRE: It put him in a situation of severe financial hardship. He has a family of eight people and on his application form, which he didn't actually complete, his living expenses were estimated to be $800 per month, which calculates down to $25 per week per person, which is roughly $3.60 per day per person.
STEPHEN LONG (to Deng Gatluak): You understood you had to pay the loan back?
DENG GATLUAK: Yeah.
STEPHEN LONG (to Deng Gatluak): But you didn't realise you had to pay back the interest on the loan.
DENG GATLUAK: Yes, because you don't know the system here...
STEPHEN LONG: His wife Nyatut still speaks virtually no English and has no assets, yet she was made the guarantor on the car loan.
It's one of at least 18 utterly inappropriate and unaffordable loans given to Sudanese refugee families in south-east Melbourne.
LAUREN WALKER, SOLICITOR, CONSUMER ACTION LAW CENTRE: In one case we had a nine-year-old girl who was acting as an interpreter to the bank.
STEPHEN LONG (to Lauren Walker): A nine-year-old girl was accepted by the bank as being an appropriate person to interpret for a refugee family with no English, in a complex financial transaction?
LAUREN WALKER, SOLICITOR, CONSUMER ACTION LAW CENTRE: It doesn't - it's unbelievable.
STEPHEN LONG: The fallout has forced the Commonwealth Bank to change its whole approach. It told "Four Corners" that after an "internal investigation" into these loans, it introduced a new "affordability policy".
Under pressure from consumer advocates such as Lauren Walker, it's waived most of the outstanding debts, but not before families had struggled for years to service them.
GARRY ROTHMAN, UNITING CARE, BROADMEADOWS: If we're seeing people on low incomes and on Centrelink benefits being lent money that they have no way of repaying, then what are they doing to people who are on even higher incomes and how are they burdening them with debt that they can't repay?
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: It strikes me that it's nonsensical, the amount of total debt out there. And no-one seems to know how much debt because a borrower can borrow money across multiple providers of credit.
STEPHEN LONG: The debt binge has been fed by a relaxation of standards across all classes of lending. In housing, the rule of thumb used to be that your mortgage repayments shouldn't be more than 30 per cent of gross household income.
But the old test has been junked. Now the banks are happy to fund mortgages that leave a family just a tad above the bread line.
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: There's no way that you can actually stress test people's sensitivity to rising rates when you don't actually know how much debt they have.
STEPHEN LONG: Australia's top banking analyst Brian Johnson says it makes no sense.
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: They take someone's disposable income and then they work out what these people need to live on, but they use a poverty index to actually do that.
Now when I have a look at that dollar figure, I can't reconcile how anyone - a family of four for example - could live in any urban centre on that amount and actually live. It should be called extreme poverty. But I think it's somewhat naive to think that people in extreme poverty will be still happily paying off their home loan - it's a nonsense.
SUSAN: I was amazed that somebody would give a person on a disability pension, working two to three days a week on a low wage - it was just the basic office duties - a loan for nearly $200,000.
STEPHEN LONG: But someone did, and not a fringe lender, a major - the NAB. And the repayments put her a mile below that poverty line.
STEPHEN LONG (to Susan): What really strikes me when I look at this is your net wage at the time you got the loan from the bank - just $235 a week - and you were getting a loan for what, nearly $200,000.
SUSAN: Yes, it was, yeah, that with a little bit of pension on top it.
STEPHEN LONG: Susan, who didn't want us to use her full name, has a metabolic blood disorder that's had her in and out of hospital for years. The debt stress made the condition worse and soon she wasn't working at all. Now she's trying to access her super to save her home.
STEPHEN LONG (to Susan): So what drove you to fight so hard to keep this little home?
SUSAN: Because my daughter and I deserve to have our home. And it is my responsibility. I'm, I'm, I'm the mum of a young adult daughter who deserves to have the stability of a home.
RENE PLOEGMAKERS, UNITING CARE, BROADMEADOWS: Pride is an incredible issue for I guess those who certainly never expected themselves to find they were going to be in financial hardship.
(Walking with Stephen Long through large pantry)
The pantry really provides the most basic sort of stuff, you know. There's milk, there's cereal, vegemite...
STEPHEN LONG: It's a measure of people's desperation to hold onto their homes. Here at Broadmeadows in outer Melbourne, Uniting Care is giving more emergency food aid to people with mortgages than people in public housing.
RENE PLOEGMAKERS, UNITING CARE, BROADMEADOWS: Often the case with people who have had that sort of experience is they're coming to see us well and truly when things are in the most awful sort of state. Credit cards are totally maxed out, they're getting letters warning them of legal action et cetera, there's a potential to be losing the house, there are questions about whether they can hold on to the car, the kids are having really disrupted, really disruptive schooling; a whole, whole, whole package.
STEPHEN LONG: Many of the homeowners who end up here borrowed the maximum the lenders would give them when interest rates were at historic lows.
(Excerpts from bank executives reporting on performance):
1: You'll see in the result excellent credit quality. The credit quality is absolutely fantastic at this point …
2: Turning to financials, you can see our operating income was up eight per cent...
3: ... underlying performance of these businesses are strong, they seem to ebb...
4: Those in the early part of this new half ...
(End of excerpts)
STEPHEN LONG: For some of the banks it's reporting time, a chance to show how well they've done and how they plan to weather to global credit crunch.
All of them apply a protective margin for interest rate rises. They calculate the number of hikes you can notionally absorb and still be able to pay your loan and meet your basic needs. It's called a serviceability buffer.
We quizzed a couple of regional players. Suncorp Metway:
(to John Mulcahy at press conference): Stephen Long from the ABC. Mr Mulcahy, what serviceability buffer do you build in on home mortgages and personal loans for rising interest rates?
JOHN MULCAHY, CEO, SUNCORP METWAY: We normally take into account a buffer of something like one and a half per cent increased interest rate.
STEPHEN LONG: Bendigo Bank:
(to Jamie McPhee at press conference): What margin, what buffer for serviceability do you build in for rising interest rates?
JAMIE MCPHEE, BENDIGO BANK: At the moment for someone to get a loan the serviceability of that loan is done at two per cent over the rate of the mortgage.
STEPHEN LONG: And the biggest home lender - Commonwealth Bank.
RALPH NORRIS, CEO, COMMONWEALTH BANK (at press conference): We put in a buffer of 200 basis points...
STEPHEN LONG: That's two per cent. But interest rates have gone up by more than three per cent since May 2002.
There have been a dozen consecutive increases by the Reserve Bank and the banks have added a couple more on top.
RALPH NORRIS, CEO, COMMONWEALTH BANK (at press conference): I have to say I do get annoyed at times at people who concentrate on blaming banks when banks have taken a very prudent approach to lending. It doesn't make any sense for us to lend money to people who are going to get into problems. It makes very good sense for us to make sure that the lending policies and procedures we have in place lend money to people who are capable of meeting their commitments.
STEPHEN LONG: Maybe, but not a single lender had a buffer big enough to protect borrowers from the rate shocks.
The top end was three per cent, the lowest, a wafer-thin 0.6.
But if the mortgage is crushing you, there's always the plastic.
STEPHEN LONG (to Brian Johnson): So do you think we're seeing a situation where people are really under stress on their mortgages and are getting credit cards and basically living off credit on the plastic?
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: There's no other way that you, there's no other conclusion you can really draw from the data. And in fact when you speak to the banks about that quantum level of credit card debt there's a noticeable silence.
STEPHEN LONG (to Kim White): What happens when interest rates rise? Is there any winding back on the push to sell credit?
KIM WHITE, FORMER NAB EMPLOYEE: No there's not. In fact there would probably be more because the bank knows that people are in a tighter situation, that they still want you to keep pushing and trying to lend them as much money as you can. It would be as though we were in a total vacuum as though interest rates didn't exist.
(Excerpt from DVD):
(On screen text: "Works 2 jobs to pay her mortgage")
WOMAN: When you're trying to meet the mortgage and all the other repayments there's no lifestyle, there's no fashion, there's no going out, there's no nothing. Basics. Keep to the basics. No Christmas presents.
(End of excerpt)
STEPHEN LONG (to Professor Terry Burke, in his office, watching DVD): Can't even afford to buy Christmas presents. That reminds me of stories my mother told about growing up in the 30s in the Great Depression.
PROFESSOR TERRY BURKE, SWINBURNE UNIVERSITY: We actually did ask about that in a survey about how people felt their housing experiences compared to that of their parents.
(Excerpt from survey results):
"Am I better off than my parents?
"44% Worse off than my parents
"31% Better off than my parents
"25% Similar situation"
(End of excerpt)
STEPHEN LONG: It's difficult to quantify the level of pain and vulnerability among those under the weight of debt, but Professor Terry Bourke and his colleagues from the Australian Housing and Urban Research Institute have had a crack.
They surveyed nearly 400 households that bought homes recently in the mortgage belts of Brisbane, Sydney and Melbourne.
PROFESSOR TERRY BURKE, SWINBURNE UNIVERSITY: What we found was that almost 50 per cent of all households were relying on either overtime or a second job of the main income earner to sustain the mortgage. Now that's fine so long as the economy is still steaming along at full speed but any slow down in the economy, that's what will go, the part-time job, the casual payments, overtime, and then you're in trouble.
(Excerpt from DVD):
People that do own a car are kind of scratching around trying to put a couple of dollars' worth of petrol in...
(End of excerpt)
STEPHEN LONG: The study featured face-to-face interviews with people under pressure and it came to a disturbing conclusion.
PROFESSOR TERRY BURKE, SWINBURNE UNIVERSITY: We're thinking probably in the order of 250,000, 300,000 households are potentially at risk of falling over because of either interest rates even going higher than they are at the moment or because of a slow down in the economy and loss of the second job or loss of overtime.
DIANNE DAVIES: Today's the big day, we're very, lock, change the locks and, kick us out (sigh). We can't get a place, there's nowhere to rent. (Crying) It's just humiliating. I mean losing your house is bad enough, let alone your stuff being put out on the street, so I don't know what's going to happen.
(Footage of Kevin sandblasting the paving around the house.)
STEPHEN LONG: Houseproud to the end.
Back at the Davies' family home in Kellyville, the clean up has gone down to the wire.
The locksmith is hard at work, the house has been repossessed and the real estate agent is on his way to collect the keys.
DIANNE DAVIES (to Kevin): Gotta give him the key, Kev. Do you wanna do the honours, well honours … whatever you wanna call it.
KEVIN: All right, I'll go do it.
DIANNE DAVIES: We have to get our clothes.
STEPHEN LONG (to Kevin and Dianne): Who's going to do it?
DIANNE DAVIES: Kev's going to be the man.
KEVIN: Just keep walking?
DIANNE DAVIES (to Kevin): Yeah, you're the man, Kev.
(Kevin walks to the driver's side of a car parked outside the house. The window stays up for a few seconds.)
KEVIN: He doesn't want to be in it.
(The driver winds the window down.)
KEVIN (handing the key to man inside the car): Here you go. Thanks Mark, you're Mark?
MAN (to Kevin): Thanks very much.
KEVIN (to man): Yeah, thanks mate. That's two front door keys, actually I've got to give you the what's-a-name keys, the sliding door keys.
MAN (to Kevin): I'll come back and see you once all this is finished.
KEVIN (to man): Yeah, we're all done inside, any way mate, it's all done.
MAN (to Kevin): Thank you.
KEVIN (to man): Thanks Mark.
(Car drives away)
DIANNE DAVIES: Well it's done. We've lost everything. It's all gone (crying, Kevin hugs her). It sucks. It's not right. It's just not right.
(To child, walking down the driveway, away from the house): Come on mate.
STEPHEN LONG: It's the heartache behind the cold statistics.
DIANNE DAVIES (to child): Where's your shoes?
CHILD (to mother): I do not have any shoes.
DIANNE DAVIES (to child): You don't have any shoes?
STEPHEN LONG: Last year, in New South Wales alone, and in these economic good times...
DIANNE DAVIES (to child): Say bye house! Bye house! That one.
CHILD (waving): I am.
STEPHEN LONG: ... nearly five-and-a-half thousand households had their homes repossessed. That's about 60 per cent more than during the last recession.
DIANNE DAVIES (to child, walking up towards a garage): That's it Charles. Here's our home for the next couple of days, weeks.
STEPHEN LONG: Not a home you'd wish on any family - from four bedrooms, two bathrooms and a double garage, to - a double garage, bunking down on mattresses and waiting to see if the repossession auction in a few weeks is enough to clear their debts.
DIANNE DAVIES: I've had enough now. As you can see I'm really tired and all I want is my own place to live in and just so I don't actually have to come home every day and stay here and see my house empty is quite disturbing to me. It upsets me and I'll cry and then I'll stop and then I'll cry. And the kids are pretty similar actually. They keep going, why we going … Charlie goes up and goes to the door and says, you know, "I wanna go inside." And I say, "You can't, it's not our house any more."
Out here houses bought for $900,000 a few years ago have sold for not much more than half that. The staggering decline raises questions about the valuations the banks and the buyers relied on.
BRENDON HULCOMBE, CEO, HERRON TODD WHITE: The valuer should be able to act without fear or favour but unfortunately we're getting a lot of pressure from lenders who want to get high valuations to get their deals through.
STEPHEN LONG: When he's not out in bayside Brisbane training for triathlons, Brendan Hulcombe runs Australia's biggest property valuation firm by the book. But he's worried about the industry.
BRENDON HULCOMBE, CEO, HERRON TODD WHITE: I don't know how many are being over-valued but I can tell you that every hour of every day, pressure is put on valuers to write higher figures.
STEPHEN LONG (to Brendon Hulcombe): So have you seen that directly?
BRENDON HULCOMBE, CEO, HERRON TODD WHITE: Sure.
STEPHEN LONG (to Brendon Hulcombe): Tell me about it, what have you seen?
BRENDON HULCOMBE, CEO, HERRON TODD WHITE: Look I've actually had guys on the phone to me saying look if you can't write this particular number on a particular valuation that it will be the last valuation instruction that we see from them.
MATT GANTER, VALUER, HERRON TODD WHITE (driving Stephen Long around area): This is your classic mortgage belt area on the northern fringe of Brisbane. Lots of first home buyers and lots of interstate investors typically with large mortgages.
STEPHEN LONG: We're out on the road with Herron Todd White valuer, Matt Ganter.
MATT GANTER, VALUER, HERRON TODD WHITE: In any sort of cyclical down turn the people out here are the first ones to get whacked.
STEPHEN LONG: Just as banks have become freer with their lending they've become looser when it comes to assessing what a property is worth.
Often they don't even bother to send a valuer through the front door and they're not always aware of the backdoor deals being done to get the sales though.
MATT GANTER, VALUER, HERRON TODD WHITE: There's a bit of an issue out here where developers rebate to the tune of up to around about 15,000 on a block for 160,000, which brings the true value of what people are paying down to the 145,000 mark.
STEPHEN LONG (to Matt Ganter): So the banks are getting a false picture?
MATT GANTER, VALUER, HERRON TODD WHITE: If they're relying on the automated valuation models and there's rebates involved, absolutely.
STEPHEN LONG: Rebates that distort the price on the sales contract; lenders leaning on valuers; when the boom ends, it could all add up to trouble.
BRENDON HULCOMBE, CEO, HERRON TODD WHITE: Well I guess at its worst you're talking about someone who's borrowing beyond their capability or capacity. And you know, if it goes bad, they are servicing a loan that's beyond what they should. The security that the bank holds might not in fact be what they think they hold.
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: When things are good you can't make a bad loan. It's all about making as many loans as you can, and that certainly was the rule. So what we've had, and this is a global phenomenon, we've had a debt funded binge for people to basically buy assets. That's how you made money. That's unwinding at the moment because of the global liquidity crunch in the wake of the US subprime crisis.
STEPHEN LONG: The fallout from dodgy home lending in the United States has sent sharemarkets plummeting around the globe. And that's exposed another unnerving dimension of Debtland - the many thousands of Australians who have borrowed money to invest in shares.
It's called margin lending and loans to buy stock now account for three-and-a-half per cent of all household debt - more than $40 billion. That's as much as the entire amount that Australians have racked up on their credit cards.
CRAIG BEAVER: When I rationalised my property portfolio down to one residential property I decided to invest in shares.
STEPHEN LONG: Meet Craig Beaver. He's got a Masters degree in engineering and a head for numbers. He'd made more than $100,000 investing conventionally on the stock market and he'd planned to do the prudent thing and use that profit to knock a chunk off his mortgage.
His stockbroker had other ideas.
CRAIG BEAVER: I first went to him to talk about selling the shares, saying that I would like to reduce my overall mortgage by selling the shares, what to you think? He said, oh yes, no, yes, no. And then said, have you thought about margin lending? And with the market performance and the graphs that I was shown etc etc it all looked quite good.
STEPHEN LONG: But looks can be deceptive. The credit crunch hit, the market dived, the margin calls came.
Margin loans are great in a rising market but when the market falls you have to top up the loan or your shares get sold at a loss. So Craig Beaver did what comes naturally to so many these days: he pulled out the plastic.
CRAIG BEAVER: So to avoid selling the shares and making a substantial loss, I actually took out a cash advance on my credit card because I really didn't think this was going to be a long term - long term being the weeks, the months that the market fall has been going on - and I thought well it will turn around fairly soon and I'll be able to discharge the cash advance on my credit card without too much drama.
That was with one margin call. I think I have now had actually four margin calls.
STEPHEN LONG: In just four months, he's lost $140,000.
CRAIG BEAVER: My strategy at the moment is I am refinancing my home mortgage to establish a line of credit to then pay out the margin loan.
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: Everyone likes to focus in these neat little debt buckets, you know, as though it's one particular category and the fact is that it's impossible to aggregate up the amount of debt a household has in total. The margin lenders don't know about the credit card debt. The individual credit card debt lenders don't know about the other credit card.
I would challenge anyone out there, absolutely anyone, find twenty people and ask them and you will find someone with eight to 10 credit cards out there where the level of debt will scare the daylights out of you.
(Excerpt from financial counsellors meeting):
MAN: I'm finding clients that come in with multiple creditors, nine credit cards. And I'm thinking, who's doing the credit checking? What are they doing?
(End of excerpt)
STEPHEN LONG: The plastic excess has hit a whole new level with the advent of the store card. These financial counsellors will tell you that in-house credit with deferred payment terms is the new epidemic of debt stress.
(Excerpt continued):
MAN: I started to do a list of who he had loans with and I stopped him half way through the list and I said, "It's a wonder you haven't got anything with GE," and he just piped up and he said, "I have." He said, "I hadn't got to the end of the list." (Laughter) He said, "I've got two with GE."
Now they the funny thing is they seem to be the lenders of last resort.
(End of excerpt)
STEPHEN LONG: At more than 10,000 shops nationwide you can buy now, pay later. The cards carry the names of respected brands such as Myer and Harvey Norman.
(Excerpt continued):
GARRY ROTHMAN, UNITING CARE, BROADMEADOWS: People are moving into those houses on the outskirts of Melbourne and Sydney who are suddenly faced with a huge house that needs furnishing, so Harvey Normans provide all the furniture with nothing to pay for four years...
(End of excerpt)
STEPHEN LONG: Behind nearly all the store cards, providing the credit is one company: GE. It began life producing the world's first electric light bulbs in the 1900s; now GE is a global financial colossus and it dominates the market for store-branded credit cards worldwide.
GARRY ROTHMAN, UNITING CARE, BROADMEADOWS: No repayments for four years - GE products. Credit cards that are GE products, store cards that are GE products. And so people may come to us and say that they have four or five debts or credit responsibilities, and they're surprised to find out that they're all with one company, they're all with GE.
CAROLYN BOND, CONSUMER ACTION LAW CENTRE: One of GE's credit cards has a 28 per cent interest rate and most people get into that card by starting off with interest free. So it's a real trap. I mean who's going to be paying, having an outstanding credit card balance over a long period of time at 28 per cent if they can actually afford to pay it back. So I think that product itself is really, it really exploits people who are in financial difficulty already.
MAN (taking phone call and typing information into computer): So the broker charged you $7000 for obtaining the finance? Okay, what's the name of the broker. All right, did he give you an invoice or a business card or anything that would give you any more details? ...
STEPHEN LONG: Carolyn Bond runs the Consumer Action Law Centre in Melbourne. She's amazed that people in financial stress can get card after card from GE, but sees a cold, hard, business logic in the lending.
CAROLYN BOND, CONSUMER ACTION LAW CENTRE: At 28 per cent you can afford to have quite a number of consumers fail to pay before you lose money. It really doesn't matter if they have a high level of defaults as long as they've priced for the risk and while consumers might suffer, the company doesn't necessarily lose from that.
DONNA ELLIOTT, DEBT ADVICE: I think that the credit control really must be lacking because otherwise we wouldn't have clients coming in with debts that are well in excess of their annual income.
STEPHEN LONG: At Malvern in Melbourne's east, Donna Elliott works to help people out of the spiral of debt.
She's a debt administrator doing deals that keep people out of bankruptcy, for a fee and a cut of the money the creditors are owed. And business is booming.
She thinks all the big lenders are pretty shabby, but GE might just be top of the list.
DONNA ELLIOTT, DEBT ADVICE: My experience is that once a client defaults with GE they're fairly quick to start the legal correspondence rolling. And my understanding is that they've, it's very brutal on that and they'll threaten a client with going getting a, putting the default on the credit list history is one thing, but the legal action and the fact of going to court and the extra charges terrifies the clients.
STEPHEN LONG: There's so many outlets where you can get a GE card it seems the company itself can't keep track. Donna Elliot's clients include people who've been given new GE cards even when they're in default with GE.
DONNA ELLIOTT, DEBT ADVICE: Nick was interesting. A young fellow, early 20s, came to me with six credit cards, three of which were GE. And we looked at his options and we decided to put him into a debt agreement after a fair bit of deliberation. He started the debt agreement and was able to meet his commitment and about five months down the track he bounced, his payments would bounce.
I just said, "Look, can you please tell me what is going on? Because I don't think you're levelling with me." And it was at that point that he said, "Oh look, I've actually gone and got another credit card for some furniture and they're putting the pressure on me to make minimum payments and therefore I can't make my debt agreement payment."
STEPHEN LONG (to Donna Elliott): Who was that credit card with?
DONNA ELLIOTT, DEBT ADVICE: That was with GE through Harvey Norman.
STEPHEN LONG: GE says its "policy is to offer credit only to people with the capacity to repay their debt." But it failed to explain why customers already in default to GE had been given new credit by the company.
STEPHEN LONG (to Kim White): Well what do you think of the decisions that were embedded in the system in the computer on the limits of credit?
KIM WHITE, FORMER NAB EMPLOYEE: I think they were immoral. They were basically targetting people who were desperate for money and the banks weren't really concerned as long as it wasn't a huge risk.
KIM WHITE, FORMER NAB EMPLOYEE (in office, taking phone call): Okay, so if you achieve the sales targets you got, you're still not going to get a pay increase, but they've actually bumped your targets up...
STEPHEN LONG: Kim White was so disillusioned he left banking. Now he mans the other end of the phone line, a union man fielding calls from distressed credit sellers.
KIM WHITE, FORMER NAB EMPLOYEE: I regularly talk to people who are in tears, they're literally in tears, the men included. They're crying on the phone because they can't meet these performance targets. They're under pressure to sell money, they're under pressure to push debt on people, and they can't do it. They just, they get to the stage, they say, "I can no longer achieve the targets they're asking for me."
We've had people who have committed suicide, we had people who committed suicide over that.
STEPHEN LONG: Behind the lending frenzy was a business imperative. To deliver the rising profits and earnings per share that investors demand year on year, banks had to find ways to sell more and more credit to more and more people. And if they didn't, someone else would.
PROFESSOR TERRY BURKE, SWINBURNE UNIVERSITY: Some of us would argue that what that's done is lead to a competitive race to the bottom in terms of lending practices. Now what I mean by that is that if you've got to hang on to your market share, you have to keep pushing out the lending conditions until you're offering 80 per cent of the value ratio, 90 per cent, 100 per cent and so on.
And then you change the definition of income from pre-tax income to after-tax income and so on, until you're putting potentially many households at risk of not being able to sustain the loan, I think.
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: Banks can do dumb lending year after year after year and that doesn't, isn't what creates the problem. It's when banks stop doing dumb lending.
AUCTIONEER (outside Dianne and Kevin's house): Many of you have come out here into the Beaumont Hills Kellyville area trying to find a really substantial, good looking two story home. I think you've actually found it right here.
DIANNE DAVIES (to child): Let's see what we get for our house, okay?
STEPHEN LONG: Saturday the 29th of March and it's D Day for the Davies family.
(to Diane Davies): What price has it got to get to clear your debts?
DIANNE DAVIES: I think it's around $650 thousand and over to clear probably all of the debts.
STEPHEN LONG: A decent crowd has rolled up for the repossession auction but there are only three registered bidders.
AUCTIONEER: We can't buy them for you, we can sell them, we need a bid, we need a start.
We know we've got registered - $600,000, $600,00. This is a bit like Randwick today isn't it? Gonna get on the horse, I'm gonna have to flog it over the line, I can see that...
STEPHEN LONG: He could be flogging a dead horse; $600,000 is way under the reserve price.
DIANNE DAVIES: I've seen even smaller houses go for more than this and we've put our whole life into this. I can't believe it, I can't believe it.
AUCTIONEER: We're certainly wanting to sell this afternoon. If you've come here to bid and you haven't yet bid, we've got $600,000 we hold, we're looking for better. If there's not a better bid than 600, we are going to pass..
BIDDER: Six-ten.
AUCTIONEER: Six-ten I have, 610 I have, six-ten it is...
STEPHEN LONG: The availability of easy credit has been the basis of nearly every boom and bust cycle in history. And as the finance flowed, the price of shares, houses and other assets soared. The legacy is a burden of household debt without precedent.
But now the global credit crunch is drying up the flood of easy money.
AUCTIONEER: Are you all done? All silent? We're not going to sell. We will pass ...
STEPHEN LONG: Out here the pain is palpable. The question is: how far will it spread?
DIANNE DAVIES (crying): It's just ridiculous. All these people turn up and what do they want? You know, they want it for 50 cents? It's too much, too much, for everyone isn't it?
END CAPTION:
The house failed to sell at auction.
The Davies family's debt problems remain unresolved.
(End of transcript)
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