Govt may cover 15%-25% of losses from leaky home loan defaults, Bankers Association says

By Alex Tarrant

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.

The revelation came in the New Zealand Bankers Association's oral submission on the the Weathertight Homes Resolution Service (Financial Assistance Package) Amendment Bill to Parliament's Local Government and Environment Select Committee on Thursday. 

Under the proposed legislation, banks, central government, and in some cases local government, are set to share the costs of any financial assistance package offered for around 23,500 dwellings that would fall under the Act. Many more dwellings are affected by the leaky home problem, but fall outside a 10-year liability limit contained in the draft legislation.

For more on the number of houses affected and the percieved costs, see Gareth Vaughan's February 17 article here. 

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.

However, 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. In a written submission to the select committee two weeks ago, the Bankers Association talked about the need for the legislation to refer to a loss sharing agreement between banks and the government.

In an oral submission to the select committee on Thursday, NZBA CEO Sarah Mehrtens said the Association wanted to clarify the nature of any credit support offered by the government.

"The credit support which is being offered to banks to support its customers has been represented publicly as a “Crown guarantee”. People commonly perceive a guarantee as being given by someone who, in effect, stands in the shoes of a borrower in case of default. To avoid confusion and unrealistic expectations, we think it is important that consumers know that a guarantee of this nature is not being offered by the Government," Mehrtens said.

"What the Government is offering is to enter into a loss sharing agreement with the Banks in relation to any amounts which are lent to fund the approved cost of leaky home repairs. This means that, in the event of a default, Government should contribute a proportion of any shortfall," she said.

"We note here that the credit support is provided in relation to the repair loan amount and not the total amount a customer has borrowed. While we cannot give the Committee exact figures, we expect the credit support extended by the Crown might cover 15 to 25 per cent of any shortfall on the repair loan. The remaining 75 to 85 per cent would therefore represent the Bank’s risk."

There was one other important feature of the credit support arrangement the Association thought it was important the public understood:

"Typically, in cases where there is third party support for the advance of credit, one would expect that lenders might be able to lend more than they otherwise would have, or perhaps lend in circumstances where they perhaps otherwise would not have. If this were the case, one might reasonably assume that Banks could pass on any benefit of a credit support arrangement to its affected customers," Mehrtens said.

"However, the suggested terms of the loss sharing agreement preclude this. They require that the Banks continue to apply their standard lending criteria when processing a customer’s loan application to fund leaky home repairs. It is important to emphasise that this loss sharing agreement does not influence the Bank’s ability to lend money to its customers, nor does it relax the circumstances in which the Bank will lend," she said.

"So the Government’s credit support – of itself – will not make it easier for customers to access a loan from their bank to finance leaky home repairs. The potential benefit to customers with leaky homes comes from the combined direct contributions that they may receive from the Crown and territorial authorities.

"We make these comments because we wish to ensure that consumers understand what is being offered and what impact the financial assistance package might have on them. Our written submission suggests one way of clarifying any confusion around the arrangements and we will continue to work with officials to ensure that our member Banks’ customers, and the public in general, are well informed and able to benefit as best they can from the proposed financial assistance package," Mehrtens said.