future maintainable earnings and pes, page-23

Hi,

here in simple terms is why our 'four pillars' are potentially are in trouble:

1. Credit expansion, and people borrowing off their inflated home equity.

2. More and more homeowners especially in NSW not being able to repay the amount borrowed.

The bulls cry:
"But that's ok - the banks have Loan Mortgage Insurance" protection.. our pillars are safe.

Our borrowers are of far better quality.


What the bulls forget:
1. Mortgage Insurance is only for homes where Loan Value Ratios are above 80%. What if home values fall MORE THAN 20% like they have ALREADY have done in the mortgage belts of capital cities such as Perth, Sydney and Melbourne. How do the banks recover their money then? By bankrupting the homeowners with worthless home theatre systems?

2. What IF the ability for homeowners to SERVICE their loans does not improve with rising food bills?

3. The high 'quality' homeowners in the US are having difficulties servicing their loans because of the snowball effect on the housing market from the poorer loans. The Aussie market is smaller, but why would you think 'quality' homeowners in Australia are shielded from the thousands of people who can't manage their money (and arguably were encouraged to mismanage their money with the use of Home Equity Lines)?

4. Key Point: If the banks did purchase insurance on their homeowners defaulting - how certain are you that the insurance company is going to be able to repay the bank? The current headlines regarding AIG have far wider implications, than the headlines surrounding Lehman brothers.


Joel