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Part Equity Finance For Homes Instead Of High Ltv Loans

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http://www.bankofengland.co.uk/publications/Pages/news/2013/132.aspx

In a speech given at the Dallas Federal Reserve, David Miles, member of the Monetary Policy Committee, argues that greater use of outside equity in financing house purchases may help counteract some of the macroeconomic problems created by excessive leverage in housing markets.

Miles argues that interest rates can be a blunt instrument with which to attempt to stabilise housing markets, as their impact on borrowing and spending unrelated to housing may well be greater than the effect on the intended target. In addition, the expected rate of return on houses in a boom period may well be much higher than any level of interest rates that can be sustained for more than an extremely brief period.

Miles says: “That problem with using monetary policy to stabilise the housing market would be acute if housing markets were overheating when the wider economy was not and consumer price inflation was low even though house price inflation was high.”

He notes that variations in permitted loan to value (LTV) and loan to income ratios, as well as in capital requirements, are likely to have some impact on leverage. But greater use of outside equity funding could permanently reduce the average level of gearing and might much reduce the need to rely on macro prudential or monetary policy levers to be pulled hard in cyclical upswings because those upswings, and their consequences, would be less severe.

One answer is to require home buyers themselves to provide more equity funding, which could be done through permanent limits on LTV ratios. However, this would substantially push back the point in their lives at which individuals could hope to become owner occupiers.

Instead, Miles argues outside equity funding could develop. This would allow outside investors to share the risk – and rewards – of home ownership. He considers forms of funding where the repayment value is explicitly linked to the value of the home, where the return to the outside funder comes in the form of a final payout which is linked to the value of the property at an agreed horizon, such as when a property is sold.

Miles notes this approach presents some problems. For example, if providers of equity funding took a high proportion of downside risk in house prices, homeowners would have little incentive to maintain their property if it started to slip in value. This is a moral hazard problem. It would also be critical to ensure home owners fully understood the contracts involved.

However, Miles argues that switching even just 10-20% of funding from debt to outside equity would very substantially reduce leverage – and that the moral hazard at that scale might be low enough to make such contracts commercially feasible.

Miles concludes that while getting a market in equity loans established is not easy, and some shared equity products have an uneven success rate, the recently launched equity loan product provided by the UK government for new build homes under its Help to Buy has already proved popular.

He concludes: “High leverage is at the heart of problems in housing market. Monetary policy and macro prudential policy can influence leverage. But more fundamentally, use of outside equity might be a way of permanently bringing down reliance upon debt financing.”

The speech here

http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech694.pdf

Find an 'outside' equity investor. Sorted.

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Housing is clearly the critical to the entire global economy.

So if you die and haven't moved and required nursing care who has first dibs on the equity the investor or govt? At this rate most people won't actually own anything it will all be an illusion and the only people with capital and wealth will be the rich.

There is nothing stopping them using LTV ratios and altering the interest rates for mortgages rather than the adjusting interest rates for the entire economy but they don't want to do this because it might impact on house prices. Anything but that!

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Translation - China to buy part of the home, and we all pay the Chinese to live in our own country.

Honestly, when will these nutters give up? They've bankrupted the nation, sold off all our industry, signed away our sovereignty, decimated the young's chances of having a life, and still they won't stop this insane bubble.

Edited by SleepyDog

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Housing exponentially driven leverage is clearly the critical to the entire global economy.

So if you die and haven't moved and required nursing care who has first dibs on the equity the investor or govt? At this rate most people won't actually own anything it will all be an illusion and the only people with capital and wealth will be the rich.

There is nothing stopping them using LTV ratios and altering the interest rates for mortgages rather than the adjusting interest rates for the entire economy but they don't want to do this because it might impact on house prices. Anything but that!

fixed that for you

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Translation - China to buy part of the home, and we all pay the Chinese to live in our own country.

Honestly, when will these nutters give up? They've bankrupted the nation, sold off all our industry, signed away our sovereignty, decimated the young's chances of having a life, and still they won't stop this insane bubble.

Bingo!

Looks like they're thinking about kick starting a home equity finance model.

Then the IBs will slice dice and securitise it.

You can actually see their minds ticking if you look hard enough.........

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Miles says: “That problem with using monetary policy to stabilise the housing market would be acute if housing markets were overheating when the wider economy was not and consumer price inflation was low even though house price inflation was high.”

On how many occasions have housing markets overheated when the wider economy has not? I can only think of one - the present. And why? Because the BoE's lunatic equity loan scheme is doing the exact opposite of what Miles is proposing, re-inflating a bubble before it's had time to naturally stabilise.

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Bingo!

Looks like they're thinking about kick starting a home equity finance model.

Then the IBs will slice dice and securitise it.

You can actually see their minds ticking if you look hard enough.........

He was pimping the same thing a couple of years ago.

http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech531.pdf

(see page 9 onwards, particularly pages 11 and 12.)

Miles was chief UK economist for Morgan Stanley from 2004 – 2009. Makes you wonder whether he's ever really stopped working for them.

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Miles says: "That problem with using monetary policy to stabilise the housing market would be acute if housing markets were overheating when the wider economy was not and consumer price inflation was low even though house price inflation was high."

On how many occasions have housing markets overheated when the wider economy has not? I can only think of one - the present. And why? Because the BoE's lunatic equity loan scheme is doing the exact opposite of what Miles is proposing, re-inflating a bubble before it's had time to naturally stabilise.

Osborne's HTB scheme.

Seems to me Miles is offering an alternative to the Tories HTB 95% £600k mortgages, as well as high LTVs in general.

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Osborne's HTB scheme.

Seems to me Miles is offering an alternative to the Tories HTB 95% £600k mortgages, as well as high LTVs in general.

It's all just talk, from his March 2004 report (page 97, Section 8.4);

Monetary policy will be easier to manage if households make well-informed decisions about mortgage products that are priced in a transparent and sustainable way and where the risks of different types of mortgage are well-understood. Risks of over-indebtedness, debt affordability and excess volatility in the housing market – problems that can make monetary policy more difficult to operate – would be reduced. This is desirable whether or not the UK adopts the euro.

Source: The UK Mortgage Market: Making a Longer-Term View, David Miles (BBC link)

The report also points out such wonderful insights as:

When choosing between mortgages, many borrowers attach great weight to the level of initial monthly repayments and too little to the likely overall cost of borrowing over the life of the loan.

Many borrowers’ understanding of interest rate risk is poor. The type of advice and information many people receive does not help them as much as it could in understanding these risks

I wonder if we could construct a society where skilled and knowledgeable people could be justly remunerated in exchange for managing these risks for us? We could call it "the financial sector"?

No, sod it, let's just let people get up to their eyeballs in debt and see what happens, (being sure to amply reward ourselves for short-term profits we can make by totally externalising all the risk.... to the same cretins who were dumb enough to borrow all the money in the first place). Well, a decade later - here we are.

Financial capture. Same as it ever was.

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Castle Trust

Quite simply, we invest your money in the best incentivised asset managers you have ever met. No, not us. Britain’s homeowners.

Most of them, particularly younger ones, have all of of their net wealth invested in their property. So they look after it.

So we lend Housa proceeds to individual homeowners with good credit as a 20% equity loan secured on their home. In exchange, if their home goes up in value, because we don’t ask for rent or interest, we share 40% of the increase in value.

Homeowners & buyers like the mortgage that leaves more in their pocket each month. And, unless they repay early, only costs them money if they make it...

http://www.castletrust.co.uk/new-trackers/where-we-invest/

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The fact is though that a house is usually built with the purpose of being a home for an individual or family. It is not an investment, or something which various participants would own a stake in like a company, it is a house. If they were on about the land it sat upon it would have slightly more credibility, but no mention of it at all in the link, perhaps it is implied?

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The BOE already has the power to independently regulate the cost of residential mortgages by

increasing the capital banks have to hold against them, and so this:

Miles argues that interest rates can be a blunt instrument with which to attempt to stabilise housing markets

is just irrelevant. So why raise it?

...

Miles was chief UK economist for Morgan Stanley from 2004 – 2009. Makes you wonder whether he's ever really stopped working for them.

He must be selling something.

Edited by (Blizzard)

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They can't just admit house prices are too high - that is the heart of the problem in the housing market. They prefer to skip around it and keep looking for new schemes.

Now unappealing shared-equity schemes which I can't see too many investors backing a market for. If anything it could drive down prices, if shared-equity was the main option. Most people don't want to buy housing where they share equity in houses with housing association or investors, any more than they want a shared-marriage.

Anyway the banks, recapped, will eventually be looking at that 3/5 of housing owned outright, pushed up to such toppy values. Next to useless to the banks, when they could be helping people to trade up, at lower prices, and still write hefty new mortgages on that property, to make big profits going forwards. Can't wait until they turn on all these politician wasters and their irrational anti-capitalism schemes.

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Translation - China to buy part of the home, and we all pay the Chinese to live in our own country.

Honestly, when will these nutters give up? They've bankrupted the nation, sold off all our industry, signed away our sovereignty, decimated the young's chances of having a life, and still they won't stop this insane bubble.

Agreed. This "equity" is to replace the MBS sludge fund that the central banks themselves promoted when they fiddled thte system so that interest rates on most investment products were below inflation rates - money flooded into MBS, those dishing out the MBS knew they were shit but thought they could bet out of the game with the commission but not any of the liabilities. The banks gained. everybody else lost, then they stuck the rest fo the bill on the taxpayer and savers. These scum have learnt nothing, they are just unreconstituted ponzi artists.

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Miles argues outside equity funding could develop. This would allow outside investors to share the risk – and rewards – of home ownership. He considers forms of funding where the repayment value is explicitly linked to the value of the home, where the return to the outside funder comes in the form of a final payout which is linked to the value of the property at an agreed horizon, such as when a property is sold.

Not sure I get this, are they saying:

A house is valued at 500K in 2013

Occupier gets a 100K mortgage

External entity funds 400K, but occupier doesn't pay anything on that debt

Leverage will mean that HPI goes to 1.5M in 2020

When house is sold, 80% of the 1M profit goes to the external entity

So we can go to 4X current valuations without occupiers paying any more than now?

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[/b]On how many occasions have housing markets overheated when the wider economy has not? I can only think of one - the present. And why? Because the BoE's lunatic equity loan scheme is doing the exact opposite of what Miles is proposing, re-inflating a bubble before it's had time to naturally stabilise.

Not sure it isn;t exactly what they want. To determine that you have to then assume that pretty much all their PR and press output is nothing short of a pack of lies, still if it bails out and protects the banks, keeps the commisions and bosnues going then they seem absolutely fine about that.

There is still zero acceptance or recognition of the damage they have done already.

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Not sure I get this, are they saying:

A house is valued at 500K in 2013

Occupier gets a 100K mortgage

External entity funds 400K, but occupier doesn't pay anything on that debt

Leverage will mean that HPI goes to 1.5M in 2020

When house is sold, 80% of the 1M profit goes to the external entity

So we can go to 4X current valuations without occupiers paying any more than now?

I'd take that deal.

Except you'd need an entity willing to stick in upto £400K, and just like us, they'd likely see the truth; house prices are way over-valued (in most areas - and even in crummy areas it's still way off) so they wouldn't invest. More likely they'll be taking the losses on equity capital values, if any one of a number of things happen in world markets. US stimulus pull-back, deflation in Europe ect. The other side of the deal, continual HPI? Don't think so.

The authorities are probably thinking, if only there were a way for politicians and central bankers to make potential housing equity investorz see it their way.... there's never a bubble with UK house prices, rescues for the market when it's topped out, and always going to be more HPI.

I'd even take a Shared Appreciation mortgage, provided they offered a really good rate, as well as kicked some equity into the deal. Of course no SA offered these days, and lenders met with a lot of official criticism against them after house price hyperinflation. They were only offered at a low point in the market anyway, when lenders could see they had a lot to gain. Then after another bout of HPI, we of course we had the "victims" complaining about their decisions.

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I'd take that deal.

Except you'd need an entity willing to stick in upto £400K, and just like us, they'd likely see the truth; house prices are way over-valued (in most areas - and even in crummy areas it's still way off) so they wouldn't invest. More likely they'll be taking the losses on equity capital values, if any one of a number of things happen in world markets. US stimulus pull-back, deflation in Europe ect. The other side of the deal, continual HPI? Don't think so.

The authorities are probably thinking, if only there were a way for politicians and central bankers to make potential housing equity investorz see it their way.... there's never a bubble with UK house prices, rescues for the market when it's topped out, and always going to be more HPI.

I'd even take a Shared Appreciation mortgage, provided they offered a really good rate, as well as kicked some equity into the deal. Of course no SA offered these days, and lenders met with a lot of official criticism against them after house price hyperinflation. They were only offered at a low point in the market anyway, when lenders could see they had a lot to gain. Then after another bout of HPI, we of course we had the "victims" complaining about their decisions.

Indeed, it's a means of HPCers laying off downside risk to ladderistas[depending on the exact details of course].

Of course, if it ends up in taxpayer baleouts then it's not quite as advertised.

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I'd take that deal.

Except you'd need an entity willing to stick in upto £400K, and just like us, they'd likely see the truth; house prices are way over-valued (in most areas - and even in crummy areas it's still way off) so they wouldn't invest. More likely they'll be taking the losses on equity capital values, if any one of a number of things happen in world markets. US stimulus pull-back, deflation in Europe ect. The other side of the deal, continual HPI? Don't think so.

The authorities are probably thinking, if only there were a way for politicians and central bankers to make potential housing equity investorz see it their way.... there's never a bubble with UK house prices, rescues for the market when it's topped out, and always going to be more HPI.

I'd even take a Shared Appreciation mortgage, provided they offered a really good rate, as well as kicked some equity into the deal. Of course no SA offered these days, and lenders met with a lot of official criticism against them after house price hyperinflation. They were only offered at a low point in the market anyway, when lenders could see they had a lot to gain. Then after another bout of HPI, we of course we had the "victims" complaining about their decisions.

Where does the house price inflation come from? Equity investors would have to keep increasing their stake to keep the market up!

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Where does the house price inflation come from? Equity investors would have to keep increasing their stake to keep the market up!

Exactly - it's fking brilliant - perpetual ponzi machine ... this time next year Rodders

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The authorities are probably thinking, if only there were a way for politicians and central bankers to make potential housing equity investorz see it their way.... there's never a bubble with UK house prices, rescues for the market when it's topped out, and always going to be more HPI.

6ca0629a64b811e180d51231380fcd7e_7.jpg

I've been thinking about Miles floating this particular piece of blue sky thinking, and it brings to mind a comment that Robert Skidelsky made on Thinking Aloud on Radio 4 when asked to comment on the book Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. Skildelsky offered words to the effect that the current crisis had not been severe enough to cause economists and politicians to consider that there actually needs to be any change.

One way that you could look at it is that what we've seen is a kind of spasm wherein a small number of economic actors (being the people and institutions who either lend money to money market funds or the people at the money market funds who actually make the decisions day to day regarding what to do with the oodles of money in their charge) got spooked by the behaviour of the residential mortgage backed securities.

All that credit was being misallocated because countries like China which were following the Japanese growth model were generating current account surpluses that needed to parked. The other side of the coin, as discussed many times here, is that certain economic strata in the industrialised West were seeing their income hollowed out by the consequences of lightly managed rapid globalisation.

Both in the surplus nations and the deficit nations there are powerful cadres of beneficiaries of the present system and a political class who have spent decades effectively advocating the system wherein the surplus nations make crap we don't need and record profits and we borrow money to buy crap we don't need and bid up house prices and pretend that we're not actually just getting deeper and deeper into debt, (when actually we are just getting deeper and deeper into debt and weakening our ability to actually pay back those debts).

In short, IMO, Skidelsky is right - the extent of the present crisis is not yet sufficient to lead to any change. Just wading through the latest Stiglitz book, The Price of Inequality, and he offers the opinion that perhaps the most important thing to come out of the crisis is that now many more people are aware of the changes to the structure of the economy which means that in the industrialised West, the median household is getting the shitty end of the stick from this global compact between nations as creditors and debtors.

The total amount of unsecured lending has been rock solid ever since the crash - that's five years. Wage inflation has been weakening ever since the crash - another five year trend. The Bank and the Treasury must now be planning for the scenario that house price inflation is not going to come from households borrowing more against growing real incomes - because real incomes are decreasing and people are not borrowing more.

If 2031 is the peak for when the tsunami of crappy interest only lending comes back to haunt us, then we are getting on to a quarter of a way down the fuse and we are in a worse position than we were when the fuse was lit.

Hence, presumably the Bank and Treasury are scratching around for 'miracles', just in the same way that people who've already made financial choices which will probably mean that they will never retire on a decent pension are getting into buy to let as a 'miracle' solution to their problem. David Miles suggesting that investors might want to take a position in our housing stock is bizarre, but it's in the same vein as suggesting that housing associations might start issuing shares.

In essence we are going to emerge from the 2008 crisis and, as Zugswang points out in his sig, we are going to relapse to the financial conduct which brought us to the 2008 crisis, (you might argue that we entirely bypassed anything which could in any way be considered a recovery phase!).

Rather than determine that we've endured decades of capital misallocation, the policies that are being proposed are attempts to answer the question, "Given that the ability of the UK economy to provide an income which will allow the median household to sustain its horrendous debt rests entirely on the upwards movement of house prices, and given that the ability of the median household to bid up houseprices with borrowed money has been exhausted, how on Earth are we going to bid up house prices?"

IMO the answer is simple - you aren't going to be able to bid up house prices.

During the boom years, the desires of the financial sector and the median household were aligned. The banks wanted profits, hence they wanted to lend and the specialist lenders wanted to churn the securitisation chain, so they really wanted to lend. Median households wanted to bet with borrowed money on a rising asset or MEW out the notional gains on asset price inflation. The banks had security against the crappy lending because house prices kept going up.

Now the needs of the two sectors are not aligned. In short, the banks want to reduce their exposure to their army of existing dodgy borrowers and the median household wants housing it can afford, (and the notion of affordable housing does not cover current house prices on a repayment basis at a 4% interest rate, let alone a 6% rate).

The 2009 Banking Act means that the executives of a bank that drives itself into the arms of the Bank of England may find itself in resolution with the mortgage book farmed out to United Kingdom Asset Resolution and the executives' very nice little earner at an end. In order to keep drawing the big salary, they need to keep their private bank private.

Further, whilst a great many median households may be totally unaware that rates are historically low, every bank executives knows that the best outcome for them is that gilts remain fairly low for a long time and that at any time something horrid could turn up and drive their funding costs north fast. Households are divided. Many, many people are totally excluded from both private ownership and capital appreciation by the heights that prices have reached relative to wages. And not everyone is completely naive about interest rates - with the recent experience of steady protracted falls throughout most of the UK, many people will not believe that buying a house, from an investment perspective, is any longer a one-way bet.

Just to add to the fun, during the Brown credit boom, the government's interests were aligned with the the banks and the avaricious and optimistic median household. The bubble drove GDP and supposedly legitimised claims to and end to boom and bust.

Now, the government's and the banks' interests are not aligned. The government want growth so that they can make the usual vacuous claims to be competent economic stewards and but they don't want the supporting narrative regarding how this is going to come to pass to concern ongoing commitment to ever increasing public borrowing. If the banks were to get with the program and lend, lend, lend, they'd need to cut their margins to the bone in order to make the lending cheap enough that people could actually borrow enough to buy houses at current prices, hence the government wants the banks as institutions to take risk without a profit to reward them, requiring the bank executives to play Russian roulette with their very nice little earner. Never going to happen.

It looks like next phase is going to be deciding that the new normal should be the old normal, but with everyone having to sit in the chair they'd picked out for themselves by 2008.

Houses prices will be defended by the policies of the government and banks - though their policies will not determine how the matter is resolved, (though when narratives are publicly communicated to explain these policies, the idea that in swathes of the UK house prices are too high will remain off the cognitive map). The fact that they are too high (i.e. they cannot be afforded with wages and wages cannot pay the rents that would be needed to make them an asset with a yield worth having) is going to have to work its way through the economy. This problem is not going to be solved. This problem is going to continue to manifest. Some of these manifestations will be eye-catching, for example the 2008 bank bailout, but for the most part it will be steady attrition as the use of monetary policy to sustain asset prices in general lures amateur investors' money into BTL, sustaining to some extent house prices at the bottom of the housing market in particular. At the same time continuing capital misallocation and failure to attend to underlying economic weakness will actively reduce the real disposable incomes that can be allocated by median households to paying rent, and in this way we'll approach a turning point as property yields are in due course extinguished completely. If something external pushes the 10-year gilt rate, or the Bank of England policy rate, it will just happen sooner.

Edited by ChairmanOfTheBored

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Houses prices will be defended by the policies of the government and banks - though their policies will not determine how the matter is resolved, (though when narratives are publicly communicated to explain these policies, the idea that in swathes of the UK house prices are too high will remain off the cognitive map). The fact that they are too high (i.e. they cannot be afforded with wages and wages cannot pay the rents that would be needed to make them an asset with a yield worth having) is going to have to work its way through the economy. This problem is not going to be solved. This problem is going to continue to manifest. Some of these manifestations will be eye-catching, for example the 2008 bank bailout, but for the most part it will be steady attrition as the use of monetary policy to sustain asset prices in general lures amateur investors' money into BTL, sustaining to some extent house prices at the bottom of the housing market in particular. At the same time continuing capital misallocation and failure to attend to underlying economic weakness will actively reduce the real disposable incomes that can be allocated by median households to paying rent, and in this way we'll approach a turning point as property yields are in due course extinguished completely. If something external pushes the 10-year gilt rate, or the Bank of England policy rate, it will just happen sooner.

Very nice.

The only point I disagree on is the bottom end of the market for flats: at best it is stagnant, and the reality for forced sales is that prices are back at the 2003 level (no experience of London/SE) and many BTL mortgagors are stuck with negative equity. This week alone I have spoken with 2 who are desperate to get out. In general my view of these types is that they are quite dishonest and incompetent - don't declare income/don't know what yield is/can't calculate notice periods on tenancies. I doubt fresh pension-hunters will be exposing themselves to the PIMP game unless prices go further south.

ps. Hey! Is this a first for that acronym?

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