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Reading Time:

3 minutes

Published:

10 December 2003

The Wrap Scams

Ultimately, we may all pay.

There is something I would like to add to the wrapping issue.

Apart from being unethical, wrapping is a market de-stabilizer which, in the long term, the whole community may have to pay for, and not just the unfortunate few as it appears now.

Currently, home owners with a mortgage pay about 1.8-2.5% above the RBA cash rate. This “premium” is the lowest amongst all other borrowing classes – predominantly because banks see property as a very low risk investment. In case of default, the bank feels comfortable that they can sell your home and recoup most, if not all, of the loan they gave you.

Wrappers abuse this premium by accessing their loan capacity from the bank and then lending to people (wrappees) who cannot get a loan from the banks, no matter how much “premium” they pay.

Three stages will occur before we all have to pay for these scams.

1. The wrappees eventually (as we are starting to see now) will be crippled by the inflated mortgage payments they are paying on the inflated property (which they do not own).

2. Eventually wrappers will no longer find people to dupe into the wrap scam (with the publicity this has been getting recently, hopefully this scenario is just around the corner), then…

3. Some wrappers will be unable to finance the properties they have purchased specifically for wrapping purposes. Depending on how widespread this practice is banks who thought they had nothing to do with wrapping, will have a rush of defaults on their hands on assets they thought was the safest of investments – property.

If this happens, then banks will have no choice but to increase the “premiums” they charge on people borrowing money for home ownership/investment. They have an obligation to their shareholders to cover their risks as best as possible.

That means we will ALL pay.

In the meantime wrappers “get rich quick” with a free-ride on the community if it all goes wrong – similar to Henry Kaye’s antics.

RESPONSE
It seems there are several hundred companies now involved in wrapping which means there are thousands of people under wrap contracts. It’s a ticking time bomb set to explode as interest rates rise and prices fall.
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