18-08-2008

Mortgage rates are increasing for many as they roll over two-year mortgages set in the spring of 2006 and find interest rates have risen to almost 9 per cent from 8.1 per cent. Petrol prices have risen 40 per cent and many investors are finding themselves over-extended.

Since May 2006, there have been 39 finance companies and mortgage trusts closed, frozen or put into receivership. Many have been calling in their short-term loans or receivers have forced sales by developers and investors.

So far, most mortgagee sales have been linked to developers or investors who borrowed to the hilt to buy multiple investment properties.

Banks have not yet been forced to put many owner-occupiers into mortgagee sales, apart from the usual rare cases of personal bankruptcy.

The mortgagee sale is a phenomenon rare to New Zealand and remains a small part of the real estate landscape, but it is growing fast and is creating a special kind of bargain hunter looking for distressed sellers.

We at interest.co.nz survey the number of mortgagee listings on the two biggest property websites, TradeMe/property and realestate.co.nz. The number listed every Monday has risen from less than 200 to almost 400 since we began the survey in March. The percentage of total listings remains relatively small at about 0.4 per cent of all listings, although this has more than doubled in the past five months.

So how big a part of the market could mortgagee sales become in New Zealand?

Our mortgagee sales rate is much lower than in the United States, where mortgagee sales are called foreclosures. In some parts of the US, one in every 35 houses is now being sold in a foreclosure. About 40 per cent of all house sales in California right now are foreclosures.

There is even a phrase for homeowners who have moved out of their house and sent the keys back to the bank because they can't afford the mortgage payments anymore. This letter to the bank is called "jingle mail", because the keys jingle when the bank's mail bag is collected in the morning.

The high number of foreclosures has created a special breed of property investor who hunts for bargains. There are at least two websites dedicated to foreclosures in the US, including foreclosures.com and realtytrac.com.

New Zealand's housing market is significantly more overvalued than many US housing markets by most measures, but most don't expect our mortgagee sales to rise as high as they have there because our lending practices have been less lax than in the US.

However, some hope a similar type of market can be developed here. A New Zealand site called mortgageeauctions.co.nz was set up last December.

For now, mortgagee sales are a small part of the market. If unemployment rises sharply and interest rates stay high, that may change as property investors in particular are forced to sell. The biggest influence will be the attitude of our banks, who have more than 90 per cent of the mortgages in New Zealand.

Unlike in the US where homeowners can walk away from their house and leave the debt behind, Kiwi homeowners cannot walk away. The debt follows them personally.

Banks will also be reluctant to force mortgagee sales when almost 97 per cent of New Zealanders' net wealth is tied up in their home.

Bernard Hickey is the managing editor of interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.