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John The Pessimist

Dt: Risky Mortgages On The Rise

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'Give a man a fire, you warm him for a day. Set him on fire and you keep him warm for the rest of his life'.

Can't stop some buyers having a Zoolander gas-station fire approach to pushing and falling over each other for as much mortgage debt as possible to pay what it's worth, entitled to homes, and awarded victim badges outbidding others by fortunes.

Seeing much by way of rubbishy housing stock, that was sticking for a long time, go Sold STC recently, at daft high prices.

Banks also expect mortgage spreads to narrow sharply in the next three months, and do not expect an improvement in demand for business loans.

Urghh. That does not sound hpc good. Sellers, including debt sellers, cut prices/charges to attract business.

What does it mean? Following something similar in US?

http://www.housingwire.com/articles/32397-mortgage-bond-spreads-tighten-to-lowest-level-in-two-years

http://www.bloomberg.com/news/articles/2014-12-18/mortgage-bond-yield-spreads-tighten-to-least-since-october-2012

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Urghh. That does not sound hpc good. Sellers, including debt sellers, cut prices/charges to attract business.

Credit spreads have been narrowing for several quarters now, but lenders continue to be surprised by the lack of demand for secured lending despite record low mortgage rates.

In the chart below the red diamonds indicate what lenders thought would happen over the following quarter (a positive value means increased demand for mortgages). The blue bars indicate what lenders report actually happened.

Once again this quarter they're expecting an uplift in demand - maybe they'll get it right this time.

CreditConditionsSurvey2015Q1.gif

http://www.bankofengland.co.uk/publications/Documents/other/monetary/ccs/2015/q1.pdf

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Credit spreads have been narrowing for several quarters now, but lenders continue to be surprised by the lack of demand for secured lending despite record low mortgage rates.

In the chart below the red diamonds indicate what lenders thought would happen over the following quarter (a positive value means increased demand for mortgages). The blue bars indicate what lenders report actually happened.

Once again this quarter they're expecting an uplift in demand - maybe they'll get it right this time.

An interesting read - thanks. Confusing but interesting. Interesting drop off in Q1 prime but expectations to recover.

I held a slim hope the next crunch would come from the borrowing side refusing to apply for mortgages at very high house prices, but in this world, I guess they can lend to corporates to pay high prices for stock to fix prices for the VI/older owners/new buyers, and be rentiers.... just like in US, where they've lost 1 million homeowners but added another 10 million renters since 2008, with Wall St, institutions and other property investors stepping in.

The consumer balked at attempts to stimulate aggregate demand via inflationary policy of negative real interest rates, and ever since, has been raising real interest rates by reducing inflation through lower aggregate demand. This is perhaps the most unappreciated yet significant market development since the financial crisis. Aggregate demand in the real economy has in fact met the limit of monetary policy, rendering QE’s impact ineffective and obsolete.

Going back to 1st December 2014... what competition there is must want to sell mortgages... what happens if there is a drop off applicants after even lower spread? Some of the smaller lenders struggle? Preferably they would seek lower house prices to draw in more mortgage applicants, but that doesn't seem to have any support by vested interests.

You can argue that what really matters is what mortgage lenders will have to pay to borrow the money they lend to buyers and that is determined by the City, not the Bank. But even there, the news is relatively good. The ‘spread’ between what your lender pays to borrow money and they amount they want to charge you is falling very gradually as competition between mortgage lenders hots up.

True, the spread is still way above where it was before the credit crunch, but it has been falling very gradually since early this year (see graph).

spreads-on-mortgages.png

‘Spreads’ on new mortgage lending – the gap between what the lender pays for money and mortgage interest rates. The spread has started to narrow and could shrink further.

Overall, it seems likely that rates will stay low for a sustained period and that, even if the Bank does increase rates sooner than it says it will, competition between lenders will help to cushion the blow. The key metric to look out for here, however, is market expectations of future interest rates rather than changes at the Bank of England.

http://blog.gspc.co.uk/tag/mortgage-approvals/

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in this world, I guess they can lend to corporates to pay high prices for stock to fix prices for the VI/older owners/new buyers, and be rentiers.... just like in US, where they've lost 1 million homeowners but added another 10 million renters since 2008, with Wall St, institutions and other property investors stepping in.

Source:

5 Feb 2015. Scorecard on housing for the last decade: Renter households up 10 million, homeowner households down 1 million.

We’ve added over 10 million renter households over the last decade. Wall Street and big investors were busy buying up properties starting in 2008 up until last year turning many single family homes into rentals. This has contributed to the big drop in supply especially in areas where new building is hard to come by.

http://www.doctorhousingbubble.com/renter-households-versus-owner-occupied-data-homeownership-rate/

1 March 2015 http://www.doctorhousingbubble.com/california-rental-armageddon-california-rents-affordable-california-moving-out/

25 Jan 2015. Millennials are saying no to buying homes. http://www.doctorhousingbubble.com/millennials-shun-the-housing-market-first-time-home-buyer-rates/

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Reading that, they could be talking about the uk.

We are nothing but a us clone

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What could possibly go wrong?

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11522483/Risky-mortgages-are-back-on-the-rise.html

'Give a man a fire, you warm him for a day. Set him on fire and you keep him warm for the rest of his life'.

Can't be arsed to drill into this but it strikes me that if you have a cohort of people who want to borrow and buy but they have a profile regarding the risks they'll take on one of the flags for approaching a limit would be falling total loan volumes (as the risk averse take fold and step away from the table, refusing the debt burden that's required to step up) and only the least risk averse transact. They are required to transact at higher prices with the same deposit so they stretch to higher LTVs if the banks will let them...

Could be a million other things too, but could be another End Days flag and not a sign that prices are about to go up, up and away...

Edited by bland unsight

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All bets off when Greece gets the debt jubilee party started?

Not sure about that, when they gave the developing nations a partial debt jubilee many got back to where they started from in a very short space of time, especially when you consider the wonders of compound interest. I can see the Greeks getting a reduction only for them to be back to the 160% ratio's again in a few short years. Not sure who they'll blame then.

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Credit spreads have been narrowing for several quarters now, but lenders continue to be surprised by the lack of demand for secured lending despite record low mortgage rates.

In the chart below the red diamonds indicate what lenders thought would happen over the following quarter (a positive value means increased demand for mortgages). The blue bars indicate what lenders report actually happened.

Once again this quarter they're expecting an uplift in demand - maybe they'll get it right this time.

CreditConditionsSurvey2015Q1.gif

http://www.bankofengland.co.uk/publications/Documents/other/monetary/ccs/2015/q1.pdf

Maybe I'm reading this wrong, but it's interesting that the cumulative drop in demand over the past year hasn't been that far off the cumulative drop of demand in 2008 which translated into a 15%-20% fall in house prices. The BoE aren't going to be able to cut base rate by 5% again like they did in 2008 to stop another fall.

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Good friends of ours have decided to rent out their 2.5 bed semi and buy a huge house on a jumbo mortgage by withdrawing equity from their semi at peak bubble valuations.

What could possibly go wrong? :-)

Overheard a couple of people in the office applying for BTL mortgages because they like the idea of someone else paying off the mortgage.

Looks like were at the 2007 peak again.

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Good friends of ours have decided to rent out their 2.5 bed semi and buy a huge house on a jumbo mortgage by withdrawing equity from their semi at peak bubble valuations.

What could possibly go wrong? :-)

Overheard a couple of people in the office applying for BTL mortgages because they like the idea of someone else paying off the mortgage.

Looks like were at the 2007 peak again.

Repayment BTL mortgages? How novel...

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Repayment BTL mortgages? How novel...

All fine until the bubble pops and rents crater like they did in Ireland and Spain. When the cycle turns landlords will be disproportionately burnt this time around simply because there are more renters who won't be able to pay rent.

BTL at <4% gross yield, 0% interest rates and peak prices is a risky game.

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All fine until the bubble pops and rents crater like they did in Ireland and Spain. When the cycle turns landlords will be disproportionately burnt this time around simply because there are more renters who won't be able to pay rent.

BTL at <4% gross yield, 0% interest rates and peak prices is a risky game.

It will be even worse if they're on IO mortgages but don't have the nous to understand what that means. How many places in Britain can you make positive yields on a repayment mortgage, even if they are sub 4%?

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It will be even worse if they're on IO mortgages but don't have the nous to understand what that means. How many places in Britain can you make positive yields on a repayment mortgage, even if they are sub 4%?

I was chatting to them last night and their plan is this:

Remortgage their current PPR as BTL, 60% LTV, use the equity ~50k to put a 20% deposit on large house.

The rent from their ex-PPR will pay off their repayment mortgage in 7 years (due to low interest rates and overpayments)

After 7 years the rental income from the esx-=PPR pays for the mortgage on the new larger house.

All due to low interest rates. Any increase in rates or missed rent then they will have to cover this on a monthly basis.

They reckon it's a sound plan - I hide my HPC tendencies in public and simply listen and nod.

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I was chatting to them last night and their plan is this:

Remortgage their current PPR as BTL, 60% LTV, use the equity ~50k to put a 20% deposit on large house.

The rent from their ex-PPR will pay off their repayment mortgage in 7 years (due to low interest rates and overpayments)

After 7 years the rental income from the esx-=PPR pays for the mortgage on the new larger house.

All due to low interest rates. Any increase in rates or missed rent then they will have to cover this on a monthly basis.

They reckon it's a sound plan - I hide my HPC tendencies in public and simply listen and nod.

What about maintenance of their BTL? Suppose both boilers break and they get a void?

It is a great plan if everythings goes exactly as they are hoping.

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It's not a bad plan under normal circumstances. By normal circumstances that includes banks behaving properly and not like banshees and if the plan goes wrong they take the consequences.

They're foregoing some space to obtain rental income. They could live in a bigger house but they choose to forgo the space in return for rental.

At peak prices and zero interest rates it's got to be risky especially if there's a severe downturn in the economy with the risk of job losses including tenants cutting back.

Edited by billybong

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I was chatting to them last night and their plan is this:

Remortgage their current PPR as BTL, 60% LTV, use the equity ~50k to put a 20% deposit on large house.

The rent from their ex-PPR will pay off their repayment mortgage in 7 years (due to low interest rates and overpayments)

After 7 years the rental income from the esx-=PPR pays for the mortgage on the new larger house.

All due to low interest rates. Any increase in rates or missed rent then they will have to cover this on a monthly basis.

They reckon it's a sound plan - I hide my HPC tendencies in public and simply listen and nod.

That doesn't look at all right. How could they possibly get a rental yield that would repay a 60% LTV over a 7 year period even with rates as low as they are? Surely they would have to achieve significantly above the 11.06% gross which currently represents the highest average yield by area in the UK? It seems more likely that they are either totally kidding themselves about the nature of the mortgage, or about achievable rents in their area, or possibly both. Probably best just to keep listening and nodding though...

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That doesn't look at all right. How could they possibly get a rental yield that would repay a 60% LTV over a 7 year period even with rates as low as they are? Surely they would have to achieve significantly above the 11.06% gross which currently represents the highest average yield by area in the UK? It seems more likely that they are either totally kidding themselves about the nature of the mortgage, or about achievable rents in their area, or possibly both. Probably best just to keep listening and nodding though...

It'll be those "over-payments" Wot did it. But in BTL folklore the tenants paid it off. You're right, a 7 year term doesn't add up even at sub 2% rates nevermind the additional costs of landlording.

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It'll be those "over-payments" Wot did it. But in BTL folklore the tenants paid it off. You're right, a 7 year term doesn't add up even at sub 2% rates nevermind the additional costs of landlording.

I had read it as the over-payments were also being funded by the rent, but your take would fit better with the general pattern of delusion! Even at sub 2% low interest rate mortgages normally have high arrangement fees and significantly higher rates after the teaser period, so once the cost of either rate reversion or remortgaging are factored in there's really no way that the costs of the mortgage could be considered sub 2%. Then, as you say, there are also the additional costs of landlording, tax, etc...

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It's not a bad plan under normal circumstances. By normal circumstances that includes banks behaving properly and not like banshees and if the plan goes wrong they take the consequences.

They're foregoing some space to obtain rental income. They could live in a bigger house but they choose to forgo the space in return for rental.

At peak prices and zero interest rates it's got to be risky especially if there's a severe downturn in the economy with the risk of job losses including tenants cutting back.

BTLers will be the first against the wall to be repossessed

Edited by Eddie_George

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I was chatting to them last night and their plan is this:

Remortgage their current PPR as BTL, 60% LTV, use the equity ~50k to put a 20% deposit on large house.

The rent from their ex-PPR will pay off their repayment mortgage in 7 years (due to low interest rates and overpayments)

After 7 years the rental income from the esx-=PPR pays for the mortgage on the new larger house.

All due to low interest rates. Any increase in rates or missed rent then they will have to cover this on a monthly basis.

They reckon it's a sound plan - I hide my HPC tendencies in public and simply listen and nod.

And avoid any tax liability?

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And avoid any tax liability?

They are not aware of the tax liability and do not plan on paying it. They now have a tenant lines up (an old school friend), so it will all be cash in hand.

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