Buy To Let Finance Watch

[zugzwang]

Actually, they are positioning themselves more and more as a destination for mug punters, e.g. they are offering retail bonds and having set up Paragon Bank they are accepting deposits from the great unwashed. As they are listed anybody can buy their shares. An investor who went it at the top in 2006 would be down a cheeky 94.9% today.

Source: Paragon of Lending, Mortgage Strategy, 15 July 2015

What's 95p in every pound between friends, eh?

Michael Burry had a good crisis, Paragon not so much.

It's worth noting that the particularly enormous growth in BTL, e.g. institutions where BTL lending has almost doubled against last year, is concentrated in a handful of non-core lenders, like OneSavings plc's Kent Reliance and Paragon. I suspect that the banking sector could take a massive hit on a BTL firesale and that serious problems would only manifest in a handful of pretty marginal lenders.

I guess the yardstick must have been Northern Rock...

A West Midlands buy-to-let mortgage lender has emerged as a surprise contender to buy nationalised bank Northern Rock.

Solihull-based Paragon has requested information about the sale of Northern Rock, according to reports, in a move that could see competition to buy the taxpayer-owned bank intensify.

Chancellor George Osborne announced the sale in his Mansion House speech last month, saying it was time for taxpayers to start getting some of their money back following the bank bailouts.

Other possible contenders to buy the bank include Coventry Building Society, Virgin Money, Co-operative Financial Services, and buyout vehicle NBNK.

Industry sources said that Paragon could become a serious bidder. If it was successful, the deal would almost double its size and allow it to move into other sectors of banking.

Paragon was at the heart of the UK’s buy-to-let boom, accounting for about one in 10 loans to landlords. It escaped the fate of its nationalised rivals Northern Rock and Bradford & Bingley after an investor cash call.

The group stopped lending in February 2008 but returned to writing new loans last year. Earlier this year it reported a 32 per cent rise in pre-tax profits to £71.8 million.

Northern Rock was nationalised in February 2008 after it collapsed amid the credit crisis, sparking the first run on a UK bank for 150 years.

http://www.birminghampost.co.uk/business/finance/solihull-based-paragon-emerges-surprise-northern-3919262

[Bland Unsight]

I guess the yardstick must have been Northern Rock...

OK, so success defined by not going bust and being swept into UKAR. Success is achieved by dealing a 95% loss to your shareholders. The way you guarantee success is to make sure you're not directly holding the loans you've made.

You celebrate your success by ceasing making loans for four years, despite the fact that you are a lender. You market your business by appearing in a debate (which you sponsor) with Val Bannister from ARLA (who wears a medal as if she's the Lord Mayor) and in that debate you all agree that BTL is brilliant, (and, obviously your top mate Richard Dyson agrees too).

I mean, it's a cracking beard and all, but FFS - it's a pretty shabby way to make a living in my honest opinion.

[rantnrave]

Not seen this posted elsewhere?

Another major buy-to-let mortgage lender has tightened its lending criteria, specifically targeting borrowers with a small deposit.... On Friday, Coventry Building Society’s buy-to-let arm, Godiva, is introducing tough new requirements for borrowers with a small deposit.

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/12038639/Another-buy-to-let-lender-cracks-down-on-loans.html

[SarahBell]

This is how the Nationwide board sees it (from the results report):

"We also play a significant role in supporting a balanced approach to housing tenure by the provision of high quality buy to let loans through our subsidiary, The Mortgage Works."

Are they now desperate for more people to have accounts there to balance some of this? The £200 if someone switches is the current TV ad.

[spyguy]

Are they now desperate for more people to have accounts there to balance some of this? The £200 if someone switches is the current TV ad.

Probably. As a mutual, NW are in deep sh1t if they find themselves short of capital.

Im expecting a dry run of 'NW going bust' with the Skipton BS.

[Sancho Panza]

Not seen this posted elsewhere?

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/12038639/Another-buy-to-let-lender-cracks-down-on-loans.html

Just reading this myself.

Given 10% down would ruin many BTL IO business plans,I'm not sure what difference this will make

'Where previously Barclays required landlords to have a rental income of 125pc of the monthly interest, calculated at a mortgage rate of 5.79pc, it now requires 135pc at 5.79pc.'

[Sancho Panza]

Probably. As a mutual, NW are in deep sh1t if they find themselves short of capital.

Im expecting a dry run of 'NW going bust' with the Skipton BS.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11974651/Challenger-banks-cash-in-on-buy-to-let-boom.html

'The bank, which grew out of the Kent Reliance Building Society, now has a total loan book of £4.9bn and expects to increase net lending by one-third this year.

Analysts believe 80pc of the lending growth went to buy-to-let borrowers, versus 20pc on standard residential mortgages, as landlords take advantage of low interest rates and strong rental demand to take on more properties.

To put that in context, overall mortgage lending in the UK as a whole grew by £12.1bn so far this year, indicating OneSavings Bank is responsible for around 8pc of net new mortgage lending.

In its third quarter trading update, the bank said its cost-to-income ratio had crept above the 26pc seen in the first half of the year as it invested in more IT, though it remained below the 50pc level typically seen in the biggest banks.

“This ratio is best in class reflecting the benefit of the company’s low-cost Indian back office,” said analyst Gary Greenwood at Shore Capital.

“OneSavings Bank offers investors an ability to gain exposure to the fast-growing UK buy-to-let mortgage lending market, with a particular bias to London and the South East,” he added, recommending investors buy the stock at 387p per share.'

Looks a bargain.

[Sancho Panza]

Probably. As a mutual, NW are in deep sh1t if they find themselves short of capital.

Im expecting a dry run of 'NW going bust' with the Skipton BS.

The Hinckley and Rugby is apparently in robust health.

[Venger]

Probably. As a mutual, NW are in deep sh1t if they find themselves short of capital.

Im expecting a dry run of 'NW going bust' with the Skipton BS.

Perhaps I should delve into the detail, but on a wider overview, I don't see such risks to Nationwide. Perhaps, if they qualify, they may have to tap FLS to see them through hard shock. Or ramp up interest rates on the BTLers where possible. Besides didn't they pass the latest major stress tests (for HPC and massive financial shock) or were they not included in the test.

Carney believes that markets are vulnerable to liquidity shocks when rates move up globally and there could be a sharp increase in volatility, but he thinks that the risks are now being borne more by investors rather than core financial institutions.

Lot of HPCers seem to have trouble believing the risks are now being held by the owner-side (core financial voters as many of them like to think of themselves, protected against HPC because Gubbermint won't let it happen and hurt the special ones), BTL side. Nationwide has the BTLs and the BTLer Investor (no one gave guarantee of forever HPI) own homes to go after, hasn't it? There's all the equity to go for, in owners homes.

And into a HPC, we get fresh lending, and bookable profits with lower risk of default. I'm less likely to default on a £125K mortgage post HPC, than a £300,000 mortgage, buying someone's house who currently owns outright and thinks it's worth £400,000. Immediately bookable profits. Only fresh debt (lending in volume vs lower prices and on great volume of transactions) can defeat structural debt (imo) which requires HPC.

Mortgage lenders don't hold houses as assets on their balance sheets, they hold loans that are secured against houses.

Big difference.

Not sure why it's being implied that a collapse in the value of the underlying security automatically leads to the destruction of the banks' loan assets (and hence its liabilities - savers' deposits).

Right now most people are paying their mortgage and there are few defaulters. If house prices fell by 30%, what's changed? Why would people suddenly NOT be able to pay their mortgage?

From the BoE Quarterly Bulletin Q2 2009:

However, negative equity is by no means a sufficient condition for default to occur. Default is likely to be a painful experience and one that most households try to avoid. When it does happen it usually reflects severe financial difficulties and problems keeping up with mortgage payments. By itself, negative equity does not cause mortgage payment problems. Indeed, May and Tudela (2005) find no evidence that negative equity increased the likelihood of a household experiencing mortgage payments problems in a sample of UK households between 1994 and 2002. And, even during the early 1990s’ episode, only a very small fraction of households in negative equity were repossessed.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb090203.pdf

I finally have time this evening to address this response to my post.

You're using exactly the same generalisation of a systemic banking crisis __, and although it all sounds very scary, I'd ask you to carefully read my own post again and give it more than a cut-and-paste consideration. We're all well aware of what a bank run is, and I don't think anyone on this forum has written more than I have regarding the Great Depression and the arguments that still persist to this day about the policy response from the Federal Reserve.

I wasn't talking about the sort of circumstances that occurred in 1929-32 or 2007-09, when there were underlying reasons for the systemic financial crisis that went way beyond concerns regarding possible falls in houses prices (if you recall, UK house prices were not falling at the time of the Northern Rock affair and had yet to peak on several of the indices).

My words were (my bold): "Not sure why it's being implied that a collapse in the value of the underlying security automatically leads to the destruction of the banks' loan assets".

I'm talking about a hypothetical situation where (say) over the next three to five years UK house prices drop nominally by 30%. You claim "we know exactly what happens" and cite the bank runs of the Great Depression.

I'd say that is a completely absurd scenario. The bank run you talk of is purely a liquidity issue, and the BoE is far better prepared for this now than it was in 2008. Back then the Special Liquidity Scheme (SLS) and long-term repos gave the banking system the requisite liquidity to avoid balance sheet funding issues. At its peak in Q1 2009, SLS supplied £185bn of funding to the banking system through a collateral swap for Treasury Bills, before QE had even started (and I'd remind everyone that QE created new bank deposits).

So if you are going to claim that we will have a meltdown that will result in the loss of savers' deposits, you need to describe the process that will lead to the collapse of the banks through insolvency, not lack of liquidity. I specifically gave a link to the BoE QB article on negative equity (which you appear to have ignored) because past experience has shown that people will continue to service their mortgage even when they are deeply in negative equity. That was the experience in the 1990s crash, and it was also the experience more recently, leading the FSA to conclude in the MMR that LTV caps were not particularly useful because the correlation between high LTVs and mortgage default was weak. However you claim that "a heck of a lot of people will default" without giving any estimate whatsoever. Just the arm-waving, scary language that __ uses, with no data whatsoever to back it up.

If you want a specific example to use, how about Nationwide, which is predominantly a domestic mortgage lender so its balance sheet isn't cluttered with derivatives, commercial loans, or investment banking related activities.

The 2014 accounts are here. On page 93 you will find a detailed breakdown of their mortgage book by LTV (including on a regional basis as well).

Please describe the scenario that leads to Nationwide deposit holders losing ANY of their funds under a 30% nominal fall in house prices.

[i'll add as a final point that if you can make a convincing case for a loss for depositors, then we need to let the BoE know ASAP, because they're about to stress test banks against a 35% fall in house prices, and the expectation is that banks' Tier 1 capital will be able to take the hit.]

[Fairyland]

More woes for BTL on the way -

Global regulators join crackdown on buy-to-let

Landlords are already under pressure from British politicians and regulators. Now the Basel Committee is joining in too

Buy-to-let loans are set to get more expensive under global plans to crack down on the sector, amid fears of an unsustainable boom in the market.

Global officials at the Basel Committee, which sets financial standards for the whole world, want banks to hold twice as much capital against mortgages when the repayments are dependent on income from tenants, joining the Bank of England and the Treasury in warning of growing risks in the sector.

That is because such loans will only be repaid when the property is occupied and the landlord may struggle if tenants cannot be found.

It comes after Chancellor George Osborne announced another new tax on landlords, increasing stamp duty on the purchase of second homes and investment properties.

Under Basel Committee rules, banks have to apply a 35pc risk weighting to residential mortgage loans with a loan-to-value ratio of between 60pc and 85pc.

That measure defines how much capital a bank has to hold against the loan to make sure it can deal with a downturn in the economy when more loans migh not be paid back.

But the new plan would mean doubling that weighting to 70pc if the loan is dependent on rental income. This would, in turn, double the capital that would have to be held against the loan. Such a change would drive up the cost of lending and reduce the supply of buy-to-let mortgages for buyers.

This standard model applies to all banks except the very largest, which are allowed to use their own risk weightings if they have enough data to satisfy regulators that they understand the market fully. However, the wider tightening up on buy-to-let does still affect those giant lenders.

Banks that specialise in the sector argue that they take prudent risks and should not be hit with yet another round of charges.

But the Financial Policy Committee at the Bank of England, headed by Mark Carney, yesterday warned that buy-to-let mortgages are twice as likely to turn bad as loans taken out by owner-occupiers.

The FPC has asked the Treasury for powers to limit lending to landlords, which could include restrictions on loan-to-value and loan-to-income ratios.

The Basel Committee’s tougher rules will also apply to businesses as “commercial real estate lending is a recurring source of troubled assetsin the banking industry,” the proposal document said.

“When the repayment of the loan depends on the cash flows from lease or rental payments of the commercial property… such loans are riskier and the prospects for repayment, and for recovery in the event of a default, depend on the property rather than on the borrower.”

Good news!

Edited December 10, 2015 by Fairyland

[Fairyland]

"Landlords are already under pressure from British politicians and regulators. Now the Basel Committee is joining in too"

Should we feel sorry for them? LLs are no saints. What goes around comes around.

Edited December 10, 2015 by Fairyland

[The Knimbies who say No]

Will potentially more than double the risk weighting if what I have read is correct- in some instances it will rise from 35% to 150%.

[Bland Unsight]

Should we feel sorry for them? LLs are no saints. What goes around comes around.

It's got nothing to do with landlords qua landlords. This only affects people who've borrowed a shit ton of money from a crappy bank and sunk it all into a crappy house. All the daft BTL mugs are keen to conflate the two ideas. We need a Private Rented Sector. We don't need it funded interest-only at 75% LTV by a f**kwit with nothing to offer but a deposit and childlike faith in HPI.

You feel sorry for them all you like, but BTL is an investor market. They chose to dabble in a market with plain as the nose on your face risks (from regulatory and more overtly political perspectives). That market is now going to tear them a new @rsehole where their ignorant face presently stands. Welcome to the real world.

The irony is going to be that whilst Fat Fergus is going to generate more headlines, this here is the game. The BTL sector will be gone within a few short years.

Edited December 10, 2015 by Bland Unsight

[spunko2010]

Given this post of yours I figure that you ought to do whatever best suits your purposes.

If your borrowings are with Aldermore I reckon you should leave your savings right where they are. It was presumably salivation at the offered interest rate that brought you to their door and a belief in a free lunch that led to you not asking questions about how they paid their market leading rate.

You've misread my post, which I posted before the BTL changes were announced on budget day (I was disappointed that nothing was being done, and I don't think the changes that were announced go far enough, but whatever). I'm not a BTLer, good grief, I'm saving for a home like many here.

[Bland Unsight]

You've misread my post, which I posted before the BTL changes were announced on budget day (I was disappointed that nothing was being done, and I don't think the changes that were announced go far enough, but whatever). I'm not a BTLer, good grief, I'm saving for a home like many here.

Fair enough. Apologies offered without reservation if I've got the wrong end of the stick.

[spunko2010]

No problem. To answer your question I did choose Aldermore because of their lax attitude, I hate paperwork and gave up on Santander after the 3rd attempt to get an account open. In hindsight, choosing Aldermore was probably not my best decision so I'll investigate it further at the week. Definitely going to change though.

[Bland Unsight]

OK, as best I understand matters at a skim what matters in terms of how BTL mortgage rates will compare to owner-occupier mortgage rates moving forward can be inferred from a comparison of these two tables. The first is the proposed Standardised Approach (SA) risk-weights for lending to owner-occupiers

The next is the risk-weights that will apply to BTL

My honest opinion is that when implemented alongside the post-2016 income taxation rules, this will end BTL.

Source: Basel Committee on Banking Supervision, Second consultative document, Standards: Revisions to the Standardised Approach

for credit risk

Edited December 10, 2015 by Bland Unsight

[Bland Unsight]

No problem. To answer your question I did choose Aldermore because of their lax attitude, I hate paperwork and gave up on Santander after the 3rd attempt to get an account open. In hindsight, choosing Aldermore was probably not my best decision so I'll investigate it further at the week. Definitely going to change though.

I had some money in Nationwide till a few months ago, so it would be the worst kind of hypocrisy for me to look down my nose at anyone for their banking choices. You've got to put it somewhere, under the bed has drawbacks, NS&I funds HTB, all the banks are in the BTL game to some extent, (for now ).

[Venger]

You do occasionally come over on the negative side spunko2010, or project messages I don't really understand. (Just read your thread about 'If finding perfect home would you buy now, even if you knew market was going to fall 50%... does it really matter if you're going to live there for 30-50 years).

However takes all types.

Everyone here says the young are being ******ed over, which they are. But even if there is HPC of -50%, few young people will be able to buy on a zero hours contract - if they even have a job at all.

Then we'll have to have a 90% correction.

(Someone else on this thread; I've suppressed a detailed reply to another 'feel sorry' projection post for BTLers - feel sorry for something that matters - and look at the BTLer forums for how sorry they feel for renter-savers.)

[Bland Unsight]

For context, all the big BTL lenders are calculating regulatory capital using Advanced IRB methods. I'd be stunned if they were using risk-weights materially north of 30%, they've been explicit that they consider BTL lending to have comparable risks to owner-occupier lending.

Advanced IRB methods get signed off by the national regulator. If the Bank of England are saying that these are the risk-weights that should be in place for the less sophisticated lenders I think that the proposition that the larger lenders will be able to get away with Advanced IRB risk-weights that are significantly different is dubious.

Long and short of it, at 75% LTV a loan to a BTLer will need to generate almost three times the profit of loan to an owner-occupier (35% RW vs 90% RW). Presently there is probably almost no difference in commercial incentive following from regulatory capital rules.

[Bland Unsight]

OK, this is very speculative and perhaps seeing what I want to see and not what's there but...

Under this new taxonomy, exposures secured by either residential or commercial real estate would receive differing risk-weight treatments depending on whether repayment of the loan is materially dependent on the cash flows generated by the property. This is the main characteristic used to define specialised lending. Risk weights applied to exposures where there is material dependence would be relatively higher than risk weights applied when there is no material dependence. This is to account for the higher risk due to the stronger positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of a default.

Source: Basel Committee on Banking Supervision, Second consultative document, Standards: Revisions to the Standardised Approach

for credit risk

(page 11)

When deciding whether or not a mortgage conforms to the risk-weights (RW) in the table or whether the 150% RW applies you get a set of conditions that must be satisfied, including "ability of the borrower to repay" (para 50) and in the related para 51:

National supervisors should ensure that banks put in place underwriting policies with respect to the granting of mortgage loans that include the assessment of the ability of the borrower to repay. Underwriting policies must define (a) metric(s) (such as the loan’s debt service coverage ratio) and specify its (their) corresponding relevant level(s) to conduct such assessment. Underwriting policies must also be appropriate when the repayment of the mortgage loan depends materially on the cash flows generated by the property, including relevant metrics (such as an occupancy rate of the property)

(page 34)

I'd argue that a 125% rental cover for an interest-only mortgage makes no provision for repayment of the mortgage from the cash flows and hence an interest-only BTL mortgage doesn't meet the para 50 tests and thus should be 150% RW. And that really would be curtains for the BTL sector...

Edited December 10, 2015 by Bland Unsight

[Neverwhere]

Sorry to be a buzzkill, but earlier on page 2:

A more conservative treatment for exposures secured by real estate where repayment is materially dependent on cash flows (ie rent/sale) generated by the property.

Edit. Corrected page reference. I think the FSB Principles for Sound Residential Mortgage Underwriting Practices footnoted on page 35 is probably the place to start looking for what criteria would result in a 150% risk weighting if unmet.

Edited December 10, 2015 by Neverwhere

[Bland Unsight]

Sorry to be a buzzkill, but earlier on page 6:

OK, but in UK regulation we've moved to a position in the regulated mortgage sector where sale is not an acceptable repayment strategy. I can see how if you were building for sale then a loan extended to a developer might include sale as a repayment strategy, but my buzz is not yet killed.

[Neverwhere]

OK, but in UK regulation we've moved to a position in the regulated mortgage sector where sale is not an acceptable repayment strategy. I can see how if you were building for sale then a loan extended to a developer might include sale as a repayment strategy, but my buzz is not yet killed.

Oh good. I think that in any case this looks like an area where the Bank have the room to apply more stringent measures if they so choose.

[Bland Unsight]

Regarding timings, first consultation out December 2014 for responses by March 2015. This one out today for responses March 2016. Looking forward to the CML's response to this

Maybe a final set of rules for by December 2016 for phased implementation from about March 2017 onwards. The continuation of the present pace giving a rather odd coincidence with the Summer Budget changes...