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Extradry Martini

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Everything posted by Extradry Martini

  1. No, that guy had much more specialised knowledge than I do on the mortgage market.
  2. Re existing mortgages, no not yet. If it goes into administration, the administrator sells them off. At a steep discount, obviously. Re the MBS, yes it is but it's no big deal - mostly of that will simply be the result of the move in the risk-free rate, the US treasury yield.
  3. Exactly. (except that the lender which goes out of business isn't really a bank)
  4. First, you are very welcome. Second, who is feeling sorry for them? I'm certainly not. Third, agreed it seems unlikely that they are taking huge amounts of interest rate risk Fourth, agreed.
  5. Thanks a lot! Yes I saw the same one and linked it in my original post earlier on.
  6. I don't have any specialist knowledge of BTL mortgage contracts, so there might be clauses in them which I know nothing about. But assuming that they are like most other loan contracts, the lender goes bust and the banks which are currently financing it lose a proportion of the money they have lent to it. Not a big deal if the lender is small. The problem becomes if they are large, there are many of them and the bank lending to them is small. But even if a small bank fails, it is still nothing like 2008 - the market for this is not big enough to bring down the bigger banks, which are of course nothing like as leveraged as they were then. From a borrower perspective, nothing changes - he/she has to keep repaying the loan. The problem comes when they need to refinance as the rates are all a lot higher and competition is leaving the market as lenders like this pull out.
  7. You would only get margin calls if equity fell, which would need a fall in house prices. I don't believe they do it (or could do it) because of negative cash flow for the landlord. Some kind of fall with interest rates rising like this seems likely, but it might take time.
  8. Well credit can be seen in one way as money, but you should remember that if you lend money, you need to finance that loan. That could take place directly by the creation of a deposit in your bank, but not necessarily. So let's say you lend £10,000 to someone to buy a car. He pays the seller. The seller might deposit that money in your bank, or repay a loan you made to her before. But if that does not happen, you need to borrow the money from somewhere else. Re the money multiplier: the BoE didn't say that the money multiplier is a misconception, it said that it doesn't control it, which is true. The money multiplier is simply the amount of times that narrow money (that created by the central bank - which includes electronic money, not just notes and coins) is lent. That is autonomous of the central bank. Let me explain. The central bank creates narrow money by lending it to banks or buying an asset (as in QE). The bank lends that money, and as above it ends up in another bank, or in the same bank, and the money gets lent again. The reason we know that the money multiplier is low - or at least was - is because QE didn't really create inflation in the past. It is likely that it remains low, as the current inflation is mostly coming from the a supply shock and not from aggregate demand.
  9. Thanks for the kind words. I don't think this is anything like on the scale of Northern Rock, and even less the financial crisis which accompanied that. But it might have big implications for the real estate market.
  10. You are confusing money in circulation with credit. Not the same thing, particularly given how low the money multiplier is now. And money is not backed by house prices, no.
  11. It's a while since I posted here, but I think you'll find this interesting. We are hearing about some specialised BTL lenders in trouble, in part because banks no longer want to lend to them. For example, one lender which has ceased BTL lending (though there is no indication that it specifically cannot find finance) is Molo. There appears to be two things happening. 1) These lenders appear to have been lending at fixed rates without covering their interest rate risk. In finance, we call this the "carry trade". It comes in many forms, but in this case it means lending in a fixed rate mortgage over a long period (anything from 2 years out) and financing over the short term at a lower rate. This can be incredibly risky because if interest rates rise, you start to have negative net interest margin and you go out of business. What one should do is lend long then hedge the risk in an interest rate swap. This involves paying a long fixed rate to match the term of the mortgage, and receiving a short rate which resets say every 6 months to match the term of the bank funding. You should price the mortgage at some rate above the swap. The problem is that this space has become extremely competitive so specialist BTL lenders have been doing the carry trade in order to make their mortgages competitive and to make money. In Molo's FAQ, it says: The fact that the firm is even mentioning interest rates shows that they have been taking interest rate risk. If it had hedged their risk via swaps, it would largely (though see point 2 below) not have cared what happened to interest rates . This is a massive indictment of its risk controls, the due diligence of the banks lending to it and the regulation covering these firms. To give an idea of how this works, think about if you had been lending 2-year mortgages at the 2-year swap rate and financing it with a 6-month loan, which rolls over every 6 months. In November of last year you would have lent the mortgage at about 1%. This is the 2-year swap rate over time: Your financing cost was 0.30% for the first 6 months. That means you have made 0.70% in "carry" over the first six months (these are all annual rates, so if you had lend £100,000, you would have made £350 net interest margin). Happy days! But now, 6 months later, you come to refinance that 6-month loan. That now costs you 1.60%. But the money you lent is still only earning you 1%. So now you have negative net interest margin. Not only that, but unless interest rates come screaming down again you will have it for the rest of the term of the mortgage. Indeed, the rate could go a lot higher. 6-month lending rates: 2) The creditworthiness of these mortgages is deteriorating. After the 2008 financial crisis, a lot of the very frothy speculation went away. BTL investors looking simply to rent while they wait for their property price to rise are no longer in the market. Instead, remaining and new BTL landlords have concentrated on "cash flow" - this just means that their monthly rental income beats their mortgage costs. But they own a long-term asset, the property, so are engaged in a form of carry trade themselves. They can only charge what the rental market will allow and that is not even keeping track of inflation, let alone interest rates. So now many (depending on how they are financing, how much equity they have etc) will have net negative rental income when they come to refinance because a) the rates have gone up and b) the rates will have gone up even more than market interest rates because the lenders do not want to lend in the way they have any more (e.g. Molo). This will either cause landlords to sell, that is repay the mortgage early (which would help the interest rate situation of the lender above), but some might slip into negative equity and the lender might not be able to recover all its principal amount. There have been stories in recent years of BTL investors borrowing against any new equity (coming from house price rises) to finance the deposit on more BTL properties - in other words, leveraging to the max. They will be hurting a lot when they come to refinance. This is definitely a secondary problem for the lenders compared to (1) above, as property prices have not fallen by much yet. But equally it has implications for property prices, particularly in areas where BTL activity has been high over the past few years. All of this of course is contributing to a real estate market in which the cost of owning property is rising for everyone. EDIT: UPDATE A good thread has emerged on Twitter on exactly this subject. Here:
  12. This is what I mean - uninformed vagaries around sovereignty. Nothing concrete at all. Ok, so "Lack of honesty". Who told you that the EU was moving to be a single state? The Daily Mail? The Express? No one in the EU institutions, that's for sure. One of the very many absurd things that Brexiters believe is that the UK was the only EU state that cared about sovereignty. You do know that the reason why the European debt crisis took so long to solve was because no states wanted to give up sovereignty, right? (It was eventually solved without that needing to happen). And even if that were the case, what makes you think we would have to be part of that single state? We had already opted out of large parts of the Treaty. And even if somehow we were supposed to be part of that single state, why not just leave then? So you and all of the others voted to leave the EU because the EU "might" be moving towards becoming a single state and because if that happened the UK "might" have to be part of it and "might" not be able to leave at that point. We are nearly a quarter poorer than we otherwise would have been. And all because Brexiters were scared of one false scenario fabricated in their heads.
  13. Ok, so I have been asking Brexiters to name one benefit we might enjoy by being outside of the EU. Predictably (I have been asking it for years), none were put forward (here or on Twitter - @extradry_martin). But here is one for you HPC Brexiters: House prices will almost certainly fall, or be lower than they would otherwise be, as a result of Brexit. The question is whether one thinks that the country being around 25% poorer than it otherwise would be is worth that happening.
  14. Nice, lucky you. I lived and worked in Madrid for a long time. Would not be able to do that now. Brexit is the first time that the people of the UK have had their rights taken away from them on a permanent basis since at least the 19th century.
  15. Interesting. I can, and do, forgive. At least those who didn't know better when they voted for it. Forget, no - it was and is a monumental act of self harm for a country to impose on itself.
  16. Still in the denial phase then. 23% worse off than we would have been otherwise. That is a complete disaster.
  17. Actually, all the Brexiters I know are angry and a little paranoid. Much angrier than remainers - will lash out at anyone who criticises the referendum result. Normally end up saying "that's democracy" or "get over it". The problem is that they are not over it at all. I am no psychologist, but I suspect with a lot of them they feel they need to continue defending something which deep down they know was a massive mistake. It is the Kubler-Ross five stages of grief. They did denial about what a stupid idea Brexit is before and after the referendum, now they are in the anger phase. Next up is "bargaining" - perhaps something like "well it could have been worse". After that it is depression then acceptance. Once we get that final stage, of everyone accepting that Brexit was a completely moronic idea and a total disaster, we can do the sensible thing and join the SM & CU again.
  18. No, think of the time of the 2012 Olympics, less than 10 years ago. The UK was confident and outward-looking. Now it is a snivelling coward, hiding in the dark lying and making baseless accusations, refusing to co-operate with any EU initiative at all. To its own detriment and shame.
  19. Our economy smaller than it would be nearly 25% and that is what you say. You know that this has affected real people, right? There are tens of thousands of people who have lost their jobs, and thousands of businesses are under huge pressure because of Brexit. How about being a little more mature?
  20. What "problems"? In precise and concrete terms, please. (I won't hold my breath - I have been waiting more than five years for anyone to tell me how the EU was oppressing them). You know that we had the best of all worlds, right? Opt outs from the euro, Schengen etc and we part of the world's largest free trade area, one with absolutely no restrictions. And there was not a single EU law or regulation put in place that the sovereign UK objected to. When there were problems with up-coming legislation, we objected to it and it was changed, abandoned or we were given an opt out.
  21. Aside from saying that we should stay out of the euro, I can't remember him saying anything intelligent. What did he say? (and no, I am not going to read those links - if you have an argument to make, make it here).
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