House of cardsSunday, May 11, 2008 Reporter: Peter Overton
Producer: Hugh Nailon
Hold on tight, because it's about to hit hard.
The great mortgage meltdown is coming.
Already record numbers of Australian homebuyers are going to the wall.
And, if we're to believe some experts, there's a hell of a lot more pain to come.
So who's to blame?
Well, a good starting point is the yanks.
You see, it was the greed of American bankers that caused the global financial crisis now pushing interest rates through the roof.
In the US, they call it the "sub-prime crisis", after the dodgy, low security loans that sparked this meltdown.
These loans were made to millions of people who simply couldn't afford them.
And when they began defaulting in droves, it set off a chain reaction that's now being felt all around the world.
Including, right here in Australia.
Full transcript
INTRODUCTION - PETER OVERTON: Hold on tight, because it's about to hit hard. The great mortgage meltdown is coming. Already, record numbers of Australian homebuyers are going to the wall. And, if we're to believe some experts, there's a hell of a lot more pain to come. So, who's to blame? Well, a good starting point is the Yanks. You see, it was the greed of American bankers that caused the global financial crisis now pushing interest rates through the roof. In the US, they call it the "subprime crisis", after the dodgy, low security loans that sparked this meltdown. These loans were offered to millions of people who simply couldn't afford them. And when they began defaulting in droves it set off a chain reaction that's now being felt around the world, including right here at home.
STORY - PETER OVERTON: TOUR GUIDE: Welcome to our foreclosure bus tour of Spanos Park and Brookside Estates.
PETER OVERTON: This is the bus tour of broken dreams.
TOUR GUIDE: The first property we're going to see is a bank-owned property. It's a bigger home, a nicer home...
PETER OVERTON: Stockton California, a once booming city but now ground zero for the biggest housing crisis the world has ever seen. This house is number 1 of 14 properties that we're going to see today on the 4-hour foreclosure tour. Yes, the investment vultures are here to pick the carcass of the subprime crisis. Here, just east of San Francisco, one of America's wealthiest cities, thousands of families have gone bust, leaving a ghost town of empty and abandoned houses. But, today, they're open for inspection. Banks have put them back on the market at half their original price.
MAN: It's like buying houses on sale. I mean, they're really cheap. You know, if you can get a house for less than the price it took to build it, that's incredible, and, um, you know, I'm like a kid in a candy store, I'd like to buy a bunch of them.
PETER OVERTON: This house says everything about the US mortgage crisis - an absolute mess. Just in the last year, one million homes like this one have been repossessed by the banks. The numbers are staggering. But behind every boarded up property is a human story of an American family who've lost their dream. So, this is it?
STEVE GILLETTE: This is it.
PETER OVERTON: In Australia, we call our home our 'castle'.
STEVE GILLETTE: As it was ours for five years, until about two months ago. Welcome, Peter.
PETER OVERTON: Steve and Dinah Gillette have returned to the family home they lost just weeks ago. And this room? This was where you, I suppose, lived your life?
STEVE GILLETTE: Yeah. this is where my son learned how to walk.
PETER OVERTON: Unable to meet their crippling mortgage repayments, they're among the first victims of this mortgage crisis that threatens to swamp families around the world.
STEVE GILLETTE: And this is even where we were going to paint. We were deciding what colour we were going to paint the wall, as you can see examples.
PETER OVERTON: Yeah, so you - but you never got to paint that wall?
STEVE GILLETTE: No. No, never did.
DINAH GILLETTE: You know, when you had the home, and it's taken from you it's gone, or you've lost it, it's just - it's hard, it's really hard, so...
PETER OVERTON: And if you think Australia can escape this crisis, think again. The shock waves are already being felt. Our mortgage belt is being crunched like never before. 12 official interest rate rises since May 2002, a plummeting share market, and record home foreclosures. For hundreds of thousands of Australian families, like David and Sheralee Hunt, the crisis has already hit. So each day really sounds like a rotten struggle?
DAVID HUNT: If we lose the house, where do we go? That's our problem. I mean, I'm not going to throw my family on the street 'cause that's just not me. PETER OVERTON: Living in the outer suburbs of Melbourne, they're drowning in debt, fighting a daily battle to hold onto their home.
DAVID HUNT: If it comes to the crunch, we'd cut the power and gas off just to keep the house repayments going, 'cause the house is number 1 priority because it's a roof over our heads and it's somewhere for our little one.
PETER OVERTON: Was there ever a moment when you thought, "What have we done here?"
SHERALEE HUNT: Well, we're both good people and we say - well, I say to myself, you know, "What have I ever done to deserve this?" You know, my life's always been battling and I'm fighting it, and I'm still battling.
PETER OVERTON: It's a similar picture all over the country.
PROF. STEVE KEEN: This is the bursting of the bubble because some houses here were purchased for $950,000 sold in the last six months for $550,000.
PETER OVERTON: Economist Steve Keen has brought us to Seymour Way, Kellyville, in Sydney's north-west. In this one street, four houses have already been foreclosed and resold at nearly half-price. Is what we're seeing happening in America, coming our way?
PROF. STEVE KEEN: It has to because we've got ourselves in the same level of household debt as America as. It simply has to squeeze us the same way it has squeezed the Americans at some point, and if we think we're going to evade it I think we're living in a fool's paradise.
PETER OVERTON: What's your time frame?
PROF. STEVE KEEN: It certainly has to happen within the next two years. That, I would be willing to put, well, my house on.
PETER OVERTON: To track the beginnings of this meltdown fiasco, you have to go back to California. This isn't the Bible belt, it's the mortgage belt. Hundreds of thousands of homeowners, like Val McFatten, were sucked into debt by predatory loan sharks - offered mortgage deals they didn't have a hope in hell of paying back. So, what was your financial position when you went for your loan?
VAL MCFATTEN: Well, we had two bankruptcies, we had a rotten credit rating and we had $1,000 to our name but, yet, we were still being offered $250,000.
PETER OVERTON: You're a financial disaster?
VAL MCFATTEN: Right.
PETER OVERTON: And you bought it hook, line and sinker?
VAL MCFATTER: I sure did.
PETER OVERTON: Two years ago, when the market was booming, Val was given a subprime loan, which simply means she had a bad credit history - someone who wouldn't qualify for a prime loan. The catch was the interest rate. It started at an enticing 1%, then ballooned to nearly 14%. Now she is $15,000 behind on her loan and on the brink of losing her house. So how did you qualify? What, what checks did they do on you?
VAL MCFATTEN: The loan officer told me, "Well, you know, we could say you're self-employed", and I immediately told her, you know, if I'm going to have to do any of this, ah, and lie about it I don't want it. So she assured me, you know, "OK, don't worry," you know, "we'll work with the numbers", and, you know, I guess that's what they did.
PETER OVERTON: Do you feel you were conned?
VAL MCFATTEN: I definitely feel I was conned.
PETER OVERTON: Neighbours Steve and Dina Gillette also fell victim to predatory lenders. They were comfortably paying off a small house but were tempted to upgrade to a bigger property by an irresistibly low interest rate. They didn't read the fine print.
PROF. STEVE KEEN: That 1% is the carrot in front of the horse that gets you going then, all of a sudden, you know, it just starts like a monster that keeps growing and growing and growing.
PETER OVERTON: You're two smart people. Didn't you see this?
STEVE GILLETTE: We see it now.
PROF. STEVE KEEN: Subprimes are a way of making money by lending money to people who couldn't afford to repay it. Clearly a scam, disguised by fancy mathematics, but it had to be a scam.
PETER OVERTON: And this scam soon snowballed into a multibillion-dollar global financial disaster. You see, Wall Street's banking giants packaged up these dodgy subprime mortgages and sold them as investments around the world. Here, in Australia, super funds, even our local councils, bought them. But when American homeowners started to go belly-up and housing prices crashed, these investments became all but worthless. That triggered a global credit crunch which has hit interest rates, share prices and property values. So, just how serious is the Australian situation?
PROF. STEVE KEEN: I'd say our housing prices could be overvalued by 50%. So people won't be as wealthy as they expected, they won't be getting the superannuation returns they thought they were going to have, so it's going to it the rest of us, in terms of our retirement income streams.
PETER OVERTON: So, where do you lay the blame for the subprime crisis?
PROF. STEVE KEEN: It's the carpetbaggers of the American system who got out quick. They, they sold the con job to the poor people who took out the mortgages. They sold the con job to the councils and the superannuations that bought the bonds. They're absconded scot-free and I'm extremely sorry to see people like those in the western suburbs of Sydney, and where you've been to in the States, who are decent people made to live a life of misery.
PETER OVERTON: What did you buy this house for?
SHERALEE HUNT: Um, $209,000.
PETER OVERTON: How much did you borrow?
SHERALEE HUNT: Um, $209,000.
PETER OVERTON: And what do you owe now?
SHERALEE HUNT: $207,000.
PETER OVERTON: So, in seven years you've...
SHERALEE HUNT: Got nowhere.
PETER OVERTON: With property values plummeting, Dave and Sheralee Hunt are trapped. The sad thing is, with their poor credit rating and low income they, too, were easy prey for lenders. Should you ever have been given a loan in the first place?
DAVID HUNT: No, to be quite honest, I don't think so. It was, it was - it was banged up too - too good to say 'no' to. I mean, they put all the bells and whistles on it and made it sound really great, you know. "We've looked at your history, we've looked at your finances. You guys will be right," and all that sort of stuff. And we've thought, "Well, great!" You know, it's going to happen, we can afford it. These guys said we can. They know. They're in the business. They just say, "Sign here and you'll be right."
PETER OVERTON: But Dave and Sheralee were anything but right. After an accident stopped Dave working for three months, they fell way behind. They refinanced, consolidated all their debt, and are now paying a monthly interest rate of just under 13%. With a letterbox full of bills, the mortgage is the only one getting paid... ..just. Your phone bill is way overdue, $220. What will you pay on that?
DAVID HUNT: We'll try and put $50 on it if we can.
PETER OVERTON: Will they buy that?
DAVID HUNT: Well, hopefully, yeah.
PETER OVERTON: How long can you go on like this?
DAVID HUNT: It's not a good way to live but, unfortunately, that's the situation we're in.
PETER OVERTON: Because you want to keep this?
DAVID HUNT: Exactly. At least if we've got that, we've got something for everything we've been through.
PETER OVERTON: What's the pressure been like for you, Sheralee?
SHERALEE HUNT: Um, yeah, extremely bad. Um, I tried to commit suicide. Um, yeah, hard.
PETER OVERTON: It got that bad?
SHERALEE HUNT: Yeah, I - just thought, well, if I end it then I don't have to be around to see something that I'm going to lose.
PETER OVERTON: This misery has become commonplace in America. At a recent public counselling session near Stockton, 1,000 desperate homeowners turned up with their paperwork, searching for a way out. The social decay is so bad here, community values have gone out the window. As they leave their houses, people are leaving behind their family pets. Animal shelters are bursting with thousands of unwanted dogs, cats, even horses that have been abandoned. So, people are literally taking their furniture, taking their kids, and leaving these in the house?
TRACI JENNINGS: Absolutely. Yeah.
PETER OVERTON: The Humane Society's Traci Jennings spends her days rescuing abandoned animals from foreclosed homes. Not all of these animals are going to find happy homes.
TRACI JENNINGS: No, unfortunately, no. A lot of these animals are going to die in a euthanasia room.
PETER OVERTON: It's a sorry state of affairs. The world's most powerful economy brought to its knees by greed. But, remarkably, the battered, bruised and bankrupt will continue to chase their elusive dream. Will you go bankrupt?
STEVE GILLETTE: Well, that's another issue.
DINAH GILLETTE: Pretty much.
STEVE GILLETTE: Yeah.
PETER OVERTON: What will that do to your prospects of owning your own home again? Living the American dream?
DINAH GILLETTE: Well, be probably quite a while before we can do that again.
STEVE GILLETTE: Minimum of three years, minimum. And then they're willing to let you get back on that horse again and give it a shot because, you know, it's money. There's always somebody out there wanting to make money on you. That's what they're going to do.
PETER OVERTON: In Melbourne, the determination of the Hunt family to save their house is admirable, but if the worst of the subprime crisis is still to come, you wonder just how many other Australian families will soon find themselves in the same situation. Where do you see your future and your family's future?
DAVID HUNT: We don't look to the future 'cause that's too far ahead. I mean, we don't make plans for next month, the end of the year, whatever. We just go, like I said, day by day because we can't look that far ahead at the moment. It would be great if we could, it would be wonderful, but we just can't. I mean, we look at tomorrow - that's as far as we look.
