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About geoffps

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  1. When my daughter was 19 she got a credit card and went on a spree. She bought stuff that she didn't really need and couldn't afford. She was distraught when she started getting threatening letters from collection agencies and I hated to see her worried so I gave her a lecture and bailed her out. About 4 months later she was back in the same position, I gave her a bigger lecture and bailed her out again. To cut the story short - I bailed her out 3 times but on the 4th time I said no! She was very unhappy with me, I was in a position to help her but I wouldn't. Please Dad, I wont do it again. No! I said. Finally she paid it off but went through considerable anguish. I should never have bailed her out the second time, let alone the third. That was 10 years ago, she's OK with her money now but she did have to suffer to learn her lesson. I think this little micro example applies to all walks of life and will eventually apply to the banking system. If they don't suffer now they will finally suffer much more.
  2. You say that your friend pays about 1,000 dollars each month. Is his salary paid in dollars? If so his exposure is to the USD/SWF exchange rate and his mortgage has nothing to do with the Zloty. But if I am confusing this and he does have exposure to movement in the Zloty/SWF rate then the cost of his mortgage will obviously vary according to the way the exchange rate moves. If, for example, the Zloty/Euro exchange rate is 0.33 on the date in 2012 when Poland adopts the euro then Poles will all get 1 euro for every 3 Zloties and on that day his mortgage will not be any cheaper or more expensive but thereafter his foreign exchange risk will be based on the movement of the euro/SWF. Taking a mortgage in a foreign currency with lower interest rates can seem attractive but exchange rate movements can wipe out the interest rate benefit very quickly and turn the whole deal negative. There are many Australians who rue the day that (some years ago) they took SWF mortgages when the rate was 2 1/2% rather than pay 18% for an AUD mortgage and then saw the AUD/SWF rate move 35% against them.
  3. Does anyone know what the new rules are for banks' capital adequacy with respect to mortgages? I sat with my mouth open in astonishment as I read this Link article from the FT in 2003 .
  4. Sybil You have asked this question a few times, I'm going to try to answer it for you - When someone buys a house they effectively debit their mortgage account and savings account and pay the money to the seller who pays the money into his/her account (maybe at the same bank, maybe at a different one). The point is that the money stays within the banking system. Even if the seller uses the equity to buy a car or a packet of sweets the money gets back into the banking system. Every day banks process thousands of debits and credits and at the end of each day they tally up and are left with a small (relative to the face value of the business they've done) deficit or surplus. Their money market dealers go through a process of lending or borrowing in the overnight market with their counterparts at other banks so that their books are 'all square' when they go home. The thing is that all of this business is in the nature of book entries as you know and in theory it could be said that the volume of business doesn't really matter. If the mortgage market was half the size or twice the size it it doesn't really matter, the money (book entries) stays within the banking system and goes round and round. Except... All banks are required to keep an amount of capital which can't be touched. The capital is normally invested in assets which are considered to be risk free. Every time a bank lends money it has to allocate or earmark a small percentage of its capital against the loan according to a formula which is based on the perceived risk for each category of loan. Eventually a bank will reach a situation where all of its capital has been allocated and it can't do any more business. In this case it must either a/ increase its capital or B/ reduce its assets or c/ reduce the amount of capital which it has to allocate against its assets. If a bank lends money to another bank the risk is considered to be much less than a loan to an individual for house purchase and the capital it needs to allocate is correspondingly less so if one bank can pay another bank to insure the risk on its mortgage portfolio through a credit default swap for instance, then the risk will become 'interbank' and its capital requirement will be less. Capital which was previously 'tied up' will be freed and the bank can do more business. Similarly, banks can securitise a proportion of their mortgage by packaging them up and selling them in the form of bonds thus transferring the risk and freeing up their capital enabling new business to be done. But... If a bank a/ has entered into credit default swaps to insure its assets with bank B/ and reduced its capital allocation accordingly but bank B/ subsequently goes bust then the risk on the assets reverts to the risk on the original loans and bank a/ might find that it has a deficit of capital. Bank a/ will have to increase its capital base as we've seen the American banks scrambling to do recently. In short - if banks do a million or billion or trillion dollars of new lending they don't need to raise that much new money because the lending is just book entries but they will need to raise a fraction (perhaps 4%) of the amount to reinforce their capital base. Capital can be raised through shareholders, retained profits, subordinated loans and various other means.
  5. Ho Hum! Many people on here including me bemoan the fact that sellers are not dropping prices. I have given an example of why that happens. If you are able to twist that to suggest that it means I am hoping for another boom - then your name sums you up perfectly. By the way, I know a couple who are in a position similar to my example. They bought their house 15 years ago but have mew'd their way into this situation. Stupid? Yes of course but they did it and so did others - lots of them.
  6. Imagine this scenario - A couple with one child bought a house. It was valued at £200,000 at the peak, they had a mortgage of £180,000 but they have paid off £5,000 in the last 18 months so it's £175,000 now. Although their mortgage was 90% of the peak value they didn't feel that they'd been reckless compared to their friends who had borrowed 100% or more. They are expecting a baby and would like to move to a house with three bedrooms. The EA values their house at £190,000 but the best offer they receive is £170,000. The house they would like to buy is valued now at £235,000 but they think they could get it for £210,000. If they sell their house for £170,000 they will still owe the bank £5,000 plus they will have to find a minimum of £42,000 as deposit for the new place. They have absolutely no chance of raising £47,000 say £50,000 after costs so if they sell they will be homeless and they'll still owe the bank £5,000. They simply cannot move, even if they expect house prices to fall by a further 10% or 20% they still cannot contemplate selling. They will stay where they are and 'make do', they have no other choice, it's quite a worry for them but at least they have a roof over their heads. Many people are in a situation like this and unless something happens to them such as unemployment or higher interest rates or death they'll stay in their house indefinitely. In the meantime the rest of us will have to wait until another drama evolves from the financial markets which forces change on the present situation or we are happy to buy one of the few distressed sales which are currently offered.
  7. My wife has just watched a programme on Russian T.V. and saw the same story on Euronews. Said that Latvians are unable to sell their houses (read - unwilling to sell for very low prices) and can't find people to rent them either so they are offering them rent free for tenants who will pay the costs of utilities and rates. The houses were apparently very nice. A few years ago Latvian houses were very cheap by western standards, prices went up dramatically after peristoika and particularly after they joined the E.U. Ordinary Latvians went quickly from not having much of a pot to p1ss in to untold wealth through the increase in their property value and the prospect of losing their newly acquired riches is too much to bear. They'll let you live in their house for nothing until 'things get better'. Poor sods.
  8. geoffps


    Link 2/3 sold yesterday at auction for 580,000 so 90,000 below advertised asking price (but 30,000 above auction guide) and 95,000 below the asking price of the still advertised similar house - link 1.
  9. A bond is a loan at interest which has been packaged up as a negotiable instrument so that it can easily be bought and sold. If you buy a 3 year bond today in the sum of £1,000 with a fixed 5% yield you have to pay the issuer £1,000 today, they will pay you 5% p.a. for 3 years at which time the bond will mature and you'll get your £1,000 back. But... imagine something very unusual happens such that interest rates go up to 10% the day after you bought your bond. People with £1,000 to invest wont want to buy your bond which only yields 5%, they can get 10% elsewhere so you'll have to heavily discount the price. £500 invested at 10% will give the same interest payments as your bond but you wont have to discount it by that much, you need to factor in that its value will still be £1,000 at maturity. Of course, if interest rates go down while you hold the bond you'll be able to sell it at a profit. A number of factors can effect bond prices including general interest rates and the creditworthiness of the bond issuer.
  10. How will you deploy the capital if you leave it in USD? I changed my sterling into euros in 2007 when I sold my house. I'm going to change back to sterling now. Maybe sterling will depreciate further but I've done pretty well and it's best not to be too greedy in my opinion. I plan to make a cash offer much lower than the asking price when I see a house I like, probably get rejected but perhaps I'll strike lucky eventually. Maybe you could do the same.
  11. Can't you convert your USD into sterling to remove the currency worry and then wait for house prices to go down?
  12. geoffps


    The point is that links 2 and 3 are exactly the same house advertised on RM for sale at £670 and for auction with a £550 guide price.
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