Beaviour Of Htb Mortgage Holders In A Crash

[Guest_growlers_*]

Just a thought experiment - HTB has bothered me for a while, not so much for the HPI it has generated (although that's bad enough) but because I wonder if HTB mortgage holders will behave differently, and in a more destabilising fashion, to normal homeowners in a crash scenario.

Assuming the role of a deposit it to:
1) protect the lender in the event of a *normal* repossession following a change in borrower circumstance (e.g. job loss, illness etc.)

2) protect the lender following a market crash, if the borrower becomes unwilling and/or unable (job loss etc.) to continue repayments.

A HTB mortgage should operate as well as a normal mortgage in scenario 1). The lender will repossess and resell, and the government will likely have to pick up any transaction costs out of the government component of the loan. I would have thought HTB borrowers would be riskier (than the general home owning population) being younger on average but the banks likely have good data on this and will be able to quantify risks appropriately and reflect this in their pricing.

However, In the event of scenario 2) A crash (of say 15%), it's not clear to me that the incentives on and options available to a HTB owner are the same as for a normal FTB owner. With a 5% deposit a HTB owner would be in negative equity to the tune of 10% in a 15% market crash. Why wouldn't you declare bankruptcy at that point?

You'd be in negative equity. Your rates would go up to reflect this. You wouldn't have scrimped and saved for the deposit and would therefore have a much lower pain and regret threshold than a traditional FTB. Also, if you did loose your job during the crash (these things tend to be correlated) you may not choose to accept family support until a new job is found (as is often the case). Why throw good family money after bad? More likely that you'd move back in with the parents, declare bankruptcy and start saving again. The presence of the government backed component of the loan is irrelevant to the behaviour of the borrower and I'm not sure this point has been widely discussed.

I don't see how the banks are able to quantify the risk of default for HTB borrowers in a crash scenario as there is no data or track record to guide on their likely behaviour. But my gut feel is that: HTB borrowers are far, far riskier than traditional FTBs (for reasons noted above), that this is not being reflected in mortgage costs, and that in a relatively moderate crash scenario far more borrowers could default on their HTB mortgage than is expected (along with any other unsecured credit / student loans they might have).

The implication of this could be that HTB borrowers exacerbate price movements on the downside (as they have to the upside), and that a + 5% fall could lead to more selling. If this behaviour did become apparent, I would image mortgage rates would rise across the market (not just HTB) to reflect that fact that the market is much less structurally sound.

[Guest_northshore_*]

Perhaps but I think you misunderstand who underwrote the rest of the deposit/guarantee (and arguably the rest of the principal), and therefore the broader risk assessment. You did. All in it together.

[Habeas Domus]

What you have written is true but it requires two things to happen

1) The media to accurately report house price falls

2) The buyer to be sufficiently financially literate to realise that they are under water and sinking

Bankruptcy is not something anyone takes on lightly, despite what the idiotic Daily Mail might have you believe - most people will soldier on paying the mortgage until they have no other option.

Also I wonder if the govt of the day started losing serious cash to HTB buyers going bankrupt, they might change the rules - like student loans make them non dischargable?

[XswampyX]

From my cold, dead, hands.

They will suck it up, and still keep paying like everybody else before them.

They are 'homeowners' and so have more backbone than you average renter scum. They will prostitute their first born to pay off the governments 20%. Mark my words.

Look to the BTL'ers. They be scum, and have no morals, their first born already sold off to the banking scum for the deposit. They are already morally bankrupt and so are weak and feeble.

A pox be upon them.

Amen.

[Guest_growlers_*]

What you have written is true but it requires two things to happen

1) The media to accurately report house price falls

2) The buyer to be sufficiently financially literate to realise that they are under water and sinking

Bankruptcy is not something anyone takes on lightly, despite what the idiotic Daily Mail might have you believe - most people will soldier on paying the mortgage until they have no other option.

Also I wonder if the govt of the day started losing serious cash to HTB buyers going bankrupt, they might change the rules - like student loans make them non dischargable?

Good points. In my experience most people are well aware of the worth and movements in the value of their house.

Most people HAVE soldiered on. We don't know how HTB owners will behave. It's ownership lite. Also, what if there was no end in sight for prices and sentiment changed radically. Soldier on why?

Maybe right about bankruptcy practicalities but the Stigma has all but gone. In a falling housing market x years of no credit whilst living at home saving might be no big deal. How about a 20% fall on a £150k flat. If I were 25/26 I'd probably do it. Recoup £30k negative equity, live with parents and aim to buy again at 28/29.

I didn't realise UK student debt was non dischargeable but yes good point. The same thought occurred to me.

[FreeTrader]

Just a thought experiment - HTB has bothered me for a while, not so much for the HPI it has generated (although that's bad enough) but because I wonder if HTB mortgage holders will behave differently, and in a more destabilising fashion, to normal homeowners in a crash scenario.

Suppose we're talking about a buyer purchasing a property for 200K with 10K deposit, 40K HTB equity loan, and 150K mortgage @ 3% (5-yr fix).

What are we comparing it with? What is a 'normal homeowner'?

[RichB]

As a matter of interest, to what extent does bankruptcy clear either element... The mortgage and the gov backed bit?

[Guest_growlers_*]

Suppose we're talking about a buyer purchasing a property for 200K with 10K deposit, 40K HTB equity loan, and 150K mortgage @ 3% (5-yr fix).

What are we comparing it with? What is a 'normal homeowner'?

Do like for like. 25% deposit fairly typical ftb. So 50k personal equity vs 10k.

[FreeTrader]

Do like for like. 25% deposit fairly typical ftb. So 50k personal equity vs 10k.

Okay, thanks.

75% LTV is well below the current average FTB LTV and way below the historical average, but your point (as I understand it) is that 'normal homeowners' (as you define them) will have positive equity after a 15% fall in HPs whereas a HTB-assisted FTB will be underwater and will have little incentive to soldier on.

My caveat would be that you can't say for sure whether the HTB borrower will be in negative equity. It depends on the rapidity of the fall.

With the parameters I quoted, if the 15% drop occurred in the year after purchase, the buyer would have £9,900 negative equity. If the drop occurred over 2 years, £5,700 NE, over 3 years £1,300 NE, and over 4 years the buyer would still have positive equity of £3,100.

Considering that only 10% of FTB purchases each month are currently assisted by a HTB equity loan and that 15% nominal price falls in the UK housing market over twelve months are rare (only happened in 6 months out of 374 in the Halifax index), I don't think the actions of these owners will be material to market pricing.

[long time lurking]

Okay, thanks.

75% LTV is well below the current average FTB LTV and way below the historical average, but your point (as I understand it) is that 'normal homeowners' (as you define them) will have positive equity after a 15% fall in HPs whereas a HTB-assisted FTB will be underwater and will have little incentive to soldier on.

My caveat would be that you can't say for sure whether the HTB borrower will be in negative equity. It depends on the rapidity of the fall.

With the parameters I quoted, if the 15% drop occurred in the year after purchase, the buyer would have £9,900 negative equity. If the drop occurred over 2 years, £5,700 NE, over 3 years £1,300 NE, and over 4 years the buyer would still have positive equity of £3,100.

Considering that only 10% of FTB purchases each month are currently assisted by a HTB equity loan and that 15% nominal price falls in the UK housing market over twelve months are rare (only happened in 6 months out of 374 in the Halifax index), I don't think the actions of these owners will be material to market pricing.

I would agree on market pricing

But i think it would have a very negative effect on sentiment concerning HTB and all the other government props, it took the best part of a generation before the shared ownership disaster of the 90s was forgotten .

The only driver of sentiment for these schemes is desperation,the problems we have now are the same as what lead to the schemes of the 90s which ended in tears for most ,i can`t see it being that different this time round when that day comes

As you're figures suggest after four years they will have 3k worth of equity the problem with this is still the same they are trapped unable to move ,many of these people will have growing families ,can they wait another four years to build their equity back to a level that will allow them to secure a lager loan? will there income have increased enough to allow them to access more finance considering they may now have much larger outgoings due to now having children?

The above problems finished of two members of my extended family in the 90s who dived in to the shared ownership scheme,at a time when there was real wage inflation and they were in their early 20s at the time with good prospects of wage growth due to the advancement of their careers but it was a disaster for them

I just can't see how any of these schemes will end well without substantial wage inflation

[winkie]

Interest only.....stuck with no prospect of selling or moving..... sub letting if permitted by lender or walking away...bankruptcy is the only way out of paying debt owed...there are no longer debtor jails......everybody seems to be doing it these days, governments, states,countries......no shame.

[spyguy]

Okay, thanks.

75% LTV is well below the current average FTB LTV and way below the historical average, but your point (as I understand it) is that 'normal homeowners' (as you define them) will have positive equity after a 15% fall in HPs whereas a HTB-assisted FTB will be underwater and will have little incentive to soldier on.

My caveat would be that you can't say for sure whether the HTB borrower will be in negative equity. It depends on the rapidity of the fall.

With the parameters I quoted, if the 15% drop occurred in the year after purchase, the buyer would have £9,900 negative equity. If the drop occurred over 2 years, £5,700 NE, over 3 years £1,300 NE, and over 4 years the buyer would still have positive equity of £3,100.

Considering that only 10% of FTB purchases each month are currently assisted by a HTB equity loan and that 15% nominal price falls in the UK housing market over twelve months are rare (only happened in 6 months out of 374 in the Halifax index), I don't think the actions of these owners will be material to market pricing.

Not sure.

That 'free' 25% is not free. Don't you have that 5 years time limit ticking away?

I think the reaction will be more psychological than financial.

Hoorray - we've been 'given' 25% of the house, we'll be millionaires.

to:

House cost's less than we paid for it and we've still owe the 25%. Lets post the keys back.

[Guest_growlers_*]

Okay, thanks.

75% LTV is well below the current average FTB LTV and way below the historical average, but your point (as I understand it) is that 'normal homeowners' (as you define them) will have positive equity after a 15% fall in HPs whereas a HTB-assisted FTB will be underwater and will have little incentive to soldier on.

My caveat would be that you can't say for sure whether the HTB borrower will be in negative equity. It depends on the rapidity of the fall.

With the parameters I quoted, if the 15% drop occurred in the year after purchase, the buyer would have £9,900 negative equity. If the drop occurred over 2 years, £5,700 NE, over 3 years £1,300 NE, and over 4 years the buyer would still have positive equity of £3,100.

Considering that only 10% of FTB purchases each month are currently assisted by a HTB equity loan and that 15% nominal price falls in the UK housing market over twelve months are rare (only happened in 6 months out of 374 in the Halifax index), I don't think the actions of these owners will be material to market pricing.

Take your point on speed of the crash being important in preserving equity. However, with respect to the frequency of 15% nominal price falls, I don't think a long term analysis is appropriate. How frequent were falls of this magnitude these when the House price / FTB ratio was as high as it is today (as per the chart you posted on the London thread)? In London at least, everytime the ratio has gone above 5/6 a crash has followed. And as I noted on that thread, this valuation metric probably understates the problem due to the increasing age of buyers. If anything, I would say the probability of a 15% (minimum) decline in the medium future is very, very high.

In my previous post, I queried whether the banks had any data to see how this population will behave in a default, and I think actually they probably do in the population of FTBs issued 95% mortgages in say 2006/7 before the crash (although valuations are even worse now). There is a reason why the banks wouldn't lend out on a 95% deposit without government assistance - these buyers couldn't afford the risk adusted mortgage rates. So the government comes in and takes the risk to the bank off the table. Fine, but they haven't taken the risk out of the market. These buyers are still much more likely to default push comes to shove.

But, I'm not sure this is something that can be analysed with data as stastics. As SpyGuy notes in his follow up post, it's more about human behaviour. These buyers have next to no 'skin in the game', they haven't demonstrated prudence and sacrificed on their life style to save for their deposit and as a consequence their regret to it's loss is likely to be small. HTB may distort things further and push / enable people to buy at an unstable part of their life (e.g. unstable relationship). Depending on how things play out, buyers might even see themselves as victims and seek vengance on the banks / government through default if a proper crash gets going. 'Where is my HPI I was promised?'

I worry further, that many of these HTB buyers are buying new build crap at inflated (i.e. even above market now) values and are already primed for losses. There's a reason house builders profits shot up on HTB. As I said, they haven't saved and have been given 'free' money, so 'who cares if you overpay by £5/10K?! Prices only go up anyway.' I would suggest that a normal FTB will be more prudent and drive a harder bargain thereby further protecting themselves to falls.

I also worry about the behaviour of the lenders, I know they are supposed to look into the buyers circumstances but again, they have much less skin in the game because the government takes the lions share of the loss. Over time lending practices will weaken. We've seen this again and again.

[Executive Sadman]

Girl I worked with back in 2007/2008, cant have been on anymore money than me, and i'd just graduated and was getting crap pay, bought not one but two houses - one as a BTL, both in 2007...the second one was bought immediately after northern Rock lol.

Anyway, she started doing overtime all the time, and her behaviour became more and more erratic. Aside from leafleting for nail painting, she actually bought some baby Rabbits in to work one day to try and flog them to all us co-workers!

We were all made redundant shortly after, no idea what happened to her property empire she boasted about "im 25 and have two houses" and so on.

[lastlaugh]

What is of interest to me is the behaviour of the HTB lenders, specifically HTB2 lenders. The lenders have paid an insurance premium to protect them if 95% mortgage holders default. But presumably they can only make a claim on the insurance if they foreclose the mortgage, reposess the property, and sell at a loss.

So if, and as, prices fall, HTB2 lenders will be less inclined to forebearance, and actually incentivised to foreclose while their losses are still covered by the government guarantee. Which in turn will drive down prices further!

[LandOfConfusion]

Aside from leafleting for nail painting, she actually bought some baby Rabbits in to work one day to try and flog them to all us co-workers!

Only two houses and already selling off others' offspring? Sounds like she was well on her way to becoming a professional BTL'er.

[Habeas Domus]

It always strikes me as strange that the government is essentially nationalising a rather large proportion of the UK housing market whilst at the same time lauding the benefits of privatisation in all other areas.

Very good point, I bet they don't word it like that in the tory election manifesto.

All they need to do now is nationalise the other 75% and they will become council houses.

[LandOfConfusion]

What is of interest to me is the behaviour of the HTB lenders, specifically HTB2 lenders. The lenders have paid an insurance premium to protect them if 95% mortgage holders default. But presumably they can only make a claim on the insurance if they foreclose the mortgage, reposess the property, and sell at a loss.

I never knew they had default insurance. Paid for by the tenant mortgagee I assume?

So if, and as, prices fall, HTB2 lenders will be less inclined to forebearance, and actually incentivised to foreclose while their losses are still covered by the government guarantee. Which in turn will drive down prices further!

I've suggested before that if all the props were suddenly removed, perhaps in conjunction with a sudden interest rate rise (even a small one) the results could be quite spectacular.

[Guest_northshore_*]

It always strikes me as strange that the government is essentially nationalising a rather large proportion of the UK housing market whilst at the same time lauding the benefits of privatisation in all other areas.

And given that houses/land in the very long term tends to rise with the money supply, we, the taxpayer could all be millionaires in the future! A land of veritable Rodneys.

The new centrist dream - perpetual entrapment in private upside, mutual downside policy. Therefore strange in an increasingly consistent sense.

[Si1]

Girl I worked with back in 2007/2008, cant have been on anymore money than me, and i'd just graduated and was getting crap pay, bought not one but two houses - one as a BTL, both in 2007...the second one was bought immediately after northern Rock lol.

Anyway, she started doing overtime all the time, and her behaviour became more and more erratic. Aside from leafleting for nail painting, she actually bought some baby Rabbits in to work one day to try and flog them to all us co-workers!

We were all made redundant shortly after, no idea what happened to her property empire she boasted about "im 25 and have two houses" and so on.

Sentiment, from my personal experience, has hit a similar level in the last year

[spyguy]

Girl I worked with back in 2007/2008, cant have been on anymore money than me, and i'd just graduated and was getting crap pay, bought not one but two houses - one as a BTL, both in 2007...the second one was bought immediately after northern Rock lol.

Anyway, she started doing overtime all the time, and her behaviour became more and more erratic. Aside from leafleting for nail painting, she actually bought some baby Rabbits in to work one day to try and flog them to all us co-workers!

We were all made redundant shortly after, no idea what happened to her property empire she boasted about "im 25 and have two houses" and so on.

Shame. Couple more months and it would have been 'executive relief' at your work chair.

[debtlessmanc]

My partner (soon to be wife) and I are happily renting. She has suddenly announced that It

might be worth buying with HTB! she is an accountant and has done the figures, hate to say it but for someone in our position it works.

Basically we have 4 kids between us from previous marriages and substantial savings. We are renting a four bedroom property at mo

So one can live at home and the others can stay as needed -costs circa £1800 pcm (altrincham). If we buy new build for £480k with HTB we spend around 50% savings on deposit 12 year mortgage circa 2000pcm, 10 year building guarantee etc.

Obviously HTB is not aimed at folk like us but the women from the developers didn't bat an eyelid and said-" oh yeh loads of people like you are using it and putting the money in the bank for 5 years"

Might be leaving this site I guess...

[Si1]

My partner (soon to be wife) and I are happily renting. She has suddenly announced that It

might be worth buying with HTB! she is an accountant and has done the figures, hate to say it but for someone in our position it works.

Basically we have 4 kids between us from previous marriages and substantial savings. We are renting a four bedroom property at mo

So one can live at home and the others can stay as needed -costs circa £1800 pcm (altrincham). If we buy new build for £480k with HTB we spend around 50% savings on deposit 12 year mortgage circa 2000pcm, 10 year building guarantee etc.

Obviously HTB is not aimed at folk like us but the women from the developers didn't bat an eyelid and said-" oh yeh loads of people like you are using it and putting the money in the bank for 5 years"

Might be leaving this site I guess...

Err

Opportunity cost

OK I'll correct myself. I thought you said you were putting a 50% deposit down. You apparently aren't so OC is a much smaller issue.

In which case you're heavily leveraged against historically super low interest rates and high house prices

As roger Bootle said - he thinks there may be a miss selling scandal in the offing with HTB

Edit 2:

You actually have put a 50% deposit down, with a12 year repayment mortgage.

Conservative opportunity cost on £240k over 12 years about 40% so £100k

Conservative real terms house price falls over same period 12% (given rate since 2007 of 2% per year and baby boomer dynamic etc)

So that's £60k

And about £50k interest in your mortgage

So that's £210k over 12 years compared with £260k renting which puts you in the money. Just. And not accounting for insurance and maintenances, as well as intangibles from renting like a bad landlord, forced house move etc

If the mortgage interest rate goes up or house prices fall more (which I consider likely) then that turns into a loss very easily.

so it rather comes down to whether you prefer to own or rent during that period, plenty of intangible factors there

Edited March 29, 2015 by Si1

[R K]

I just can't see how any of these schemes will end well without substantial wage inflation

Think youve answered your own policy question.

[debtlessmanc]

Err

Opportunity cost

OK I'll correct myself. I thought you said you were putting a 50% deposit down. You apparently aren't so OC is a much smaller issue.

In which case you're heavily leveraged against historically super low interest rates and high house prices

As roger Bootle said - he thinks there may be a miss selling scandal in the offing with HTB

Edit 2:

You actually have put a 50% deposit down, with a12 year repayment mortgage.

Conservative opportunity cost on £240k over 12 years about 40% so £100k

Conservative real terms house price falls over same period 12% (given rate since 2007 of 2% per year and baby boomer dynamic etc)

So that's £60k

And about £50k interest in your mortgage

So that's £210k over 12 years compared with £260k renting which puts you in the money. Just. And not accounting for insurance and maintenances, as well as intangibles from renting like a bad landlord, forced house move etc

If the mortgage interest rate goes up or house prices fall more (which I consider likely) then that turns into a loss very easily.

so it rather comes down to whether you prefer to own or rent during that period, plenty of intangible factors there

We would borrow around 60% £100k deposit ( sorry £50k each) and £96k HTB loan, as I understand it the loan varies with the house value, ie if there is a 20% house price crash the HTB loan drops by 20%. In five years we would hope to pay off this loan with pension lump sum ( I will by 62 by then) and sell house for something smaller. We retain substantial savings for emergencies. The reason we haven't bought before is that the house we would want at the

Moment for our family was way out of reach unless we committed all out saving, which we were unwilling to do and of course is a big risk wrt interest rates and house values.

Anyway we are mulling over it.