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A permanent and substantial shift in the money market has occurred

The fallout from the finance company failure is a flight to quality. Money is being removed, at a rapid rate, from various finance companies and deposited with the banks and those that have the perceived quality. The problem is that suddenly all the second tier money has vanished. Apparently, one broker recently went to seven lenders to find only two had money to lend. More than that, their appetite for risk has gone. Only the safer deals with a wide security margin are being funded. So borrowers and deals of poor quality now find it almost impossible to find funds to prop up their requirements.

As one commentator has said "The availability of cheap credit is over".

In the rural sector there are always borrowers who fall outside the mainstream lending criteria. Reasons vary but may include disputes, matrimonials, lack of understanding, poor financial skills, inattention to detail, slow subdivisions and so on.

The lack of funding for these people will see a lot of stressed people and a number of stressed sales. Many people have borrowed to develop and subdivide land only to find greatly increased costs, but more importantly, long delays with consents, RMA and Iwi. These delays just mean more interest costs associated with the development. As professionals we all presume our clients are able to manage a subdivision and navigate their way around the red tape. Not so. They soon end up with subprime finance. This is because mainstream lenders avoid subdivisions and developments as they also see them as high risk.

What is likely to happen you may well ask?

Well my take is:
    There will be a number of stressed sales including partly subdivided properties;
    Stress levels for the owners of these properties will rise;
    The return to investors on high risk lending will rise. I mean if you get paid 7% at the bank for deposits on low risk, is 9% enough for high risk? I think not. Investors will expect a return to them of 14% -15%, maybe even to 20%.
    Lenders are going to be looking for clearer exit strategies or repayment strategies;
    Their appetite for risky lending will vanish;
    Borrowers will be put under more scrutiny prior to loans being advanced to them.
    Depositors will demand to know where their money is being lent out;
    Government will try to bring in some rules to control finance companies and where they are lending money;
    New finance companies may appear lending at even higher rates to cover the risk.
As Warren Buffet said "You only find out who is swimming naked when the tide goes out."

Conclusion

The fallout of the shift in risk and availability of cheap money will make life difficult in this particular market. The change in the economic climate together with the lack of money available in second tier lending is going to make life most interesting.

There has been a permanent and substantial shift in the market. The only thing for certain is that it is going to be less certain.


 

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