Portfolio Landlord Endgame

[frozen_out]

That is where reality and theory start to diverge IMO. Both parties want the BTL`er for the most part to hold his position, pay the mortgages and a bit off the top to the tax man, not to panic and flood the market with property. I don`t believe they will want to force too many into bankruptcy as this means no mortgage paid and no tax? How it plays out will depend on the sentiment of BTL`ers, I believe many will try to hold on by not declaring if they can, trying to raise rents, and generally just being in silly childish denial. Some will have moved already and be shifting property (Fungus would like people to believe he is in this camp, but I don`t believe his sort of money is on the table at this point in the game)

I agree with this. Due to the tax changes the BTL volume will be stripped out of the market going forward, this will cause prices to fall. The question is if this is a simple tax grab by the government or a means of bringing about a HPC. I can't see it being the latter.

There is a view espoused on here that the banks have been stress tested and are now in a position to see out a HPC. This doesn't quite square with the view on this thread that the banks have mispriced their BTL risk, the fact that they might have mispriced their risk does make them vulnerable (and if it doesn't, what's the issue with them mispricing the risk in the first place?)

IMO there will have to be some attempt somewhere to allow underwater BTLers to exit the market in an orderly way. Regardless of the banks' ability to weather a significant HPC a disorderly, panicked housing market is not good for the wider economy. History teaches us this much.

Edited January 2, 2016 by frozen_out

[mrtickle]

What a beautiful thread. Happy New Year to all. Especially Ros, whose blood must be literally boiling again

[long time lurking]

Short version; Two arms of the PTB coming together (or competing) to cause a HPC wet dream is something I will believe when it happens, much like forensic checking of back-due tax on rental income by HMRC. However the global position and the government position may be so bad that they are going to do something radical, I don`t know.

Theres no need for forensic checking it`s a simple case of check LR for purchase date convert to months x £pcm then calculate tax owed it`s then down to the individual to prove that figure is wrong

One employe could calculate hundreds per day with nothing more than the relavant address(s) and NI number for each case

[Bland Unsight]

That is where reality and theory start to diverge IMO. Both parties want the BTL`er for the most part to hold his position, pay the mortgages and a bit off the top to the tax man, not to panic and flood the market with property.

And that is where your analysis diverges from reality, and the problem arises as you fail to carefully distinguish the most part of BTLers from the most part of the BTL properties. Let me explain.

The Treasury suggested 20% of landlords affected by the budget changes. BTL is about 40% the PRS, but as only BTLers are affected, all affected landlords are BTLers. If we assume that the number of landlords in either sector is in proportion to the number of dwellings in the sector then we have that the 20% affected are drawn from 40% of landlords, i.e. half the BTLers are affected

However, as ownership is concentrated in the BTL sector and the leveraged portfolio landlords are the most affected we can be fairly confident that well over half BTL properties are going to be affected by the changes.

Simply put the nature of the changes made is not consistent with your belief that most BTL propreties would continue to service their mortgages and pay a little tax off the top.

[Bland Unsight]

Just to add to my previous reply to dances. Any rapidly growing BTL portfolio is structure to chase gains and deliver relatively little income chargeable to income tax. Pre Summer Budget this means face-washing before tax, i.e. rents completely wiped out by mortgage interest and other costs. It's clear that since 2012 HMRC have been looking for a way to deal with this situation, which results in PovertyLater clowns showing hundreds of thousands of pounds of rental income on the self-assessment forms but paying almost no income tax.

Hence when you mess with the taxation framework at all you turn an investment structured to wash its face into an investment that loses money after tax.

It was inevitable that these tax changes would affect a very large proportion of BTL properties (probably a majority) and that rather than skimming a share of the profits, they would turn a face-washing investment into a loss making investment.

I think that you are coming at matters from a particular perspective, BTL as construed by some of its boosters, as a 'nice little earner'. However, I read the Summer Budget as tackling the reality that for the leveraged portfolio landlord, whether they realise it or not, the BTL game is a tax dodge, gaming the personal income taxation and CGT framework. The Revenue aren't aiming for a skim, they are trying to shut down a tax dodge which has set up some perverse incentives and led to some bozos with massive debts and hundreds of BTLs paying sod all tax and pricing out first-time buyers.

Edited January 2, 2016 by Bland Unsight

[long time lurking]

I agree with this. Due to the tax changes the BTL volume will be stripped out of the market going forward, this will cause prices to fall. The question is if this is a simple tax grab by the government or a means of bringing about a HPC. I can't see it being the latter.

There is a view espoused on here that the banks have been stress tested and are now in a position to see out a HPC. This doesn't quite square with the view on this thread that the banks have mispriced their BTL risk, the fact that they might have mispriced their risk does make them vulnerable (and if it doesn't, what's the issue with them mispricing the risk in the first place?)

Well i`m must admit i`m with you on that one and the language coming from the BOE seems to imply they feel the same way about the banks still being vulnerab

IMO there will have to be some attempt somewhere to allow underwater BTLers to exit the market in an orderly way. Regardless of the banks' ability to weather a significant HPC a disorderly, panicked housing market is not good for the wider economy. History teaches us this much.

My take on this would be, this is why they have staggered the introduction of C24 over five years BOE have stated they fear they might all sell at once

my view is they want an orderly exit ,whether they get it is anyone's guess

Whats been highlighted on this thread could be controlled at some cost? by HMRC doing a deal with said banks

Edited January 2, 2016 by long time lurking

[Venger]

I agree with this. Due to the tax changes the BTL volume will be stripped out of the market going forward, this will cause prices to fall. The question is if this is a simple tax grab by the government or a means of bringing about a HPC. I can't see it being the latter.

There is a view espoused on here that the banks have been stress tested and are now in a position to see out a HPC. This doesn't quite square with the view on this thread that the banks have mispriced their BTL risk, the fact that they might have mispriced their risk does make them vulnerable (and if it doesn't, what's the issue with them mispricing the risk in the first place?)

IMO there will have to be some attempt somewhere to allow underwater BTLers to exit the market in an orderly way. Regardless of the banks' ability to weather a significant HPC a disorderly, panicked housing market is not good for the wider economy. History teaches us this much.

Hackneyed VI nonsense imo. Just because a few half-hearters doubt the banks ability to stand up to a hpc, think banks have mispriced risk, doesn't make it so.

~I'm not sure I possess the words to explain to you what I feel for your… Culture (HPCers). You know no glory, no pride, no worship. You have power; I've seen that; I know what you can do… but you're still impotent. You always will be. The meek, the pathetic, the frightened and cowed… they can only last so long. The strong survive. That's what life teaches us, Gurgeh, that's what the game shows us. Struggle to prevail; fight to prove worth. These are no hollow phrases; they are truth!'

~What could he say to this apex? Were they to argue metaphysics, here, now - when they'd spent the last ten days devising the most perfect image of their competing philosophies they were capable of expressing, probably in any form? What, anyway, was he to say? That intelligence could surpass and excel the blind force of evolution? That conscious cooperation was more efficient than feral competition?

-Player of Games (with minor tweak)

The banks have got assets to go for, and profitable fresh lending to make, into and after HPC. All those houses owned outright are not making the banks any money. Best fresh debt on them in a shakeup. Debtors to pursue, and fresh lending to make. There could never have been a HPC by your logic, in the past.

For you, and fetch-another-bottle-fine-wine-from-the-cellar 'de beers' accountant-company-direct master-of-masters, fully knowledge, Prescience

Re those believing it's all bank runs and bank collapses into a hpc (what do you think they last 7-8 years have been about - banks have recapitalised and smoothed out risk back onto market participants.... or the innocents as many hpcers see them, smug in their £1m homes, or saying to buy now with £350K mortgages at 3.5% because 'not a bad time to buy' - and the BTLers of course.

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:

http://www.bankofeng...in/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 as RK did, 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 RK 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.]

My emphasis on FT's post.

Most banks passed that stress test, then more the most recent one, and it didn't just cover that but stockmarket crash, sterling plunge, inflation.. loads more. Banks are hardened.

It's the 'innocents' carry the risk, not the 4 bankers sharing a rental house in London from their smug HPIer landlord. HPI galorers and BTLers carrying the risk, as well as all asset holders. HPC won't matter much to those owners who treat their homes as homes, and not 'investments'. Not one dragged them into the banks and no one is stopping them coming to market to sell / cash out, in low inventory market. More will do so in time. Then it will be Breakdown 2.0 to protect the £1M+ HPIers equity.. the very people here saying it can't happen ('They didn't know what they were doing' / 'media'.)

[janch]

What a beautiful thread. Happy New Year to all. Especially Ros, whose blood must be literally boiling again

Haa!

Any leveraged portfolio LL reading this should get their skates on with putting their properties up for sale. Any HPCs wanting to buy their first home may want to haggle hard to get a "bargain" after years of waiting. Most ex BTLs are easy to recognise in my experience and just need a little tlc to bring them up to scratch.

[Bland Unsight]

There is a view espoused on here that the banks have been stress tested and are now in a position to see out a HPC. This doesn't quite square with the view on this thread that the banks have mispriced their BTL risk, the fact that they might have mispriced their risk does make them vulnerable (and if it doesn't, what's the issue with them mispricing the risk in the first place?)

When you stress test a bank you determine what is going to happen (i.e. a scenario - a certain fall in house prices, a certain level of borrowers falling into arrears and being repossessed, a certain move in interest rates) and then you wash it all through the accounts and see if the capital base was big enough to handle the bump in the road.

When you price a loan using the interest rate you ensure that a book of such loans, if they performed in line with your expectations, would still be profitable after you'd booked all the associated costs, including losses on the expected non-performing loans.

Hence when pricing loans you might make an assumption about house prices in order to assess what you'll recover on the loans that sour, but you won't make a worse case assumption. However stress testing is all about seeing how the balance sheet as a whole copes under a worst case. They shouldn't square. The naive expectation that the two should square in the way you propose depends on a pretty thoroughgoing misunderstanding of the nature of stress testing and the mechanics of pricing risk on loans.

[long time lurking]

Hackneyed VI nonsense imo. Just because a few half-hearters doubt the banks ability to stand up to a hpc, think banks have mispriced risk, doesn't make it so.

The banks have got assets to go for, and profitable fresh lending to make, into and after HPC. All those houses owned outright are not making the banks any money. Best fresh debt on them in a shakeup. Debtors to pursue, and fresh lending to make. There could never have been a HPC by your logic, in the past.

For you, and fetch-another-bottle-fine-wine-from-the-cellar 'de beers' accountant-company-direct master-of-masters, fully knowledge, Prescience

Re those believing it's all bank runs and bank collapses into a hpc (what do you think they last 7-8 years have been about - banks have recapitalised and smoothed out risk back onto market participants.... or the innocents as many hpcers see them, smug in their £1m homes, or saying to buy now with £350K mortgages at 3.5% because 'not a bad time to buy' - and the BTLers of course.

My emphasis on FT's post.

Most banks passed that stress test, then more the most recent one, and it didn't just cover that but stockmarket crash, sterling plunge, inflation.. loads more. Banks are hardened.

It's the 'innocents' carry the risk, not the 4 bankers sharing a rental house in London from their smug HPIer landlord. HPI galorers and BTLers carrying the risk, as well as all asset holders. HPC won't matter much to those owners who treat their homes as homes, and not 'investments'. Not one dragged them into the banks and no one is stopping them coming to market to sell / cash out, in low inventory market. More will do so in time. Then it will be Breakdown 2.0 to protect the £1M+ HPIers equity.. the very people here saying it can't happen ('They didn't know what they were doing' / 'media'.)

From what i read stress test are not wort the paper they are written on,Carmen Segarra an ex FED employee blew the whistle on the shenanigans a long time ago

http://www.theguardian.com/commentisfree/2014/oct/05/carmen-segarra-whistleblower-wall-street-federal-reserve

BOE know this ?

Edit to ad a genuine question ...whats the differenc between SLS and FLS other than the acronym?

My reading of this is they are both achieving the the same thing allowing banks to access cheaper borrowing rates by converting/swapping risky collateral for BOE backed collateral have i got the wrong end of the stick ?

As in most financial scandals the details of her dispute are intricate. The European Banking Authority had demanded that European banks raise their capital holdings to make them less vulnerable to future shocks. In order to comply, the Spanish bank Santander asked if Goldman would look after some of its shares in its Brazilian subsidiary for a few years for a fee of about $40m. One Fed employee referred to it as Goldman “getting paid to hold a briefcase”. Segarra’s boss, Michael Silva, said it was “legal but shady”, and was told by a superior to leave the matter alone. That is worrying. “Legal but shady”, along with downright criminal, was precisely the ethical yardstick that sent the dominoes tumbling last time.

Edited January 2, 2016 by long time lurking

[Venger]

From what i read stress test are not wort the paper they are written on,Carmen Segarra an ex FED employee blew the whistle on the shenanigans a long time ago

http://www.theguardian.com/commentisfree/2014/oct/05/carmen-segarra-whistleblower-wall-street-federal-reserve

BOE know this ?

SLS & FLS - for someone else to answer...

Well I'm looking at it with a commercial view, (shareholders and profits for banks and Gov of a HPC) rather than any 'core-voter' HPI+ forever, 'won't let it happen' / 'BTLers/homeowners are special' type view, and think we're good to go, whenever it occurs.

And evidence suggests there's a real turn on BTLers. HPI bloated homeowners... older ones, could be next. Already the BTLers (at least those who know about the changes) are reeling with astonishment, with so many of them convinced they won GE for Conservatives.

I'm going to hazard that in 2008 the banks went easy on the margin calls as they knew that the only thing that could save them was the government stepping in to fill the hole on the liability side of their balance sheet as the money markets closed to them. As Brown did not want to see house prices collapse and that collapse to be interpreted as further evidence of his incompetency the lenders quickly came under pressure to put a halt to the fire sale (and were given assurances that they'd not be going to the wall).

Again, this time it is different. The liability side of the banks' balance sheets are now to a much greater extent retail deposits which will not be flighty in a crash so the systemic threat to the solvency of the banking sector entire no longer exists. Further the systemic threat was so significant because there was no framework for handling the insolvency of a decent sized bank. Its books would essentially freeze - there is a reason that they bailed the banks, the alternative was worse. However, the Treasury immediately got the 2009 Banking Act on the statute books and there has been a practice run for the resolution regime with a minnow, the Dunfermline, which passed off without fuss.

Hence now the execs at the big lenders know two things. Firstly, they will be allowed to go bust, because they will just be unfussily swept into UKAR. Secondly, they will know that if the bank they run goes bust, they will lose their nice little troughing job, and they won't get another so good. They are going to throw the buy-to-let investors under the bus at the first sniff of trouble and each lender will know that they mustn't dawdle with the mercy killings as their competitors would seize on the error by getting hold of and disposing the assets on which their loan books were secured before the oppo did.

The mechanics of all the leverage and the incentives for the lenders to murder their customers are extraordinary.

I think there are a fair proportion of boomers in the professional classes who have have been shielded from the vicissitudes of the world for two generations or more They are about to find out how the world works.

There was a thread on one of the BTLer forums about this.

There were BTLers convinced you had to become 'too-big-to-fail' via leverage and then the banks would then leave you alone.

I seem to recall the BTLers were split between those who embrace very high debt 'too big to fail' - and a less debt approach. Not going to track down the thread - probably findable from info in the video - but going from my memory, one of the pro high debt/leverage BTLers is now one of the BTLers convinced they can make Gov U-Turn, with measures that I so strongly disagree with and make me despair.

Anyway, such was the clash in view, (huge debt leverage vs less leverage) and difference of strong opinion between the BTLers (can you believe it - of course you can) - the question was actually the feature of a video and put to one of the specialist BTL lenders for his view. (I recall more than one BTLer with this position - maybe the banker guy didn't read through that entire lengthy thread.)

June 2014... this bit from 4:40 in...

'One point I would like to raise is on the thread somebody said 'leverage will prevent repossession' ...-just to nip that in the bud that's not the case. There's a famous saying in lending 'Your First Loss Is Your Best Loss' - and with the regulatory environment that banks now operate in, you can't forbear unrealistically. If you've got an impaired loan, you have to act quickly to protect the bank or the lender's positions. So just because you're highly leveraged does not mean that a bank won't take possession so I think people need to be very very careful about..sort of reading that. I know that during the credit crisis when banks were very desperate to protect their capital, there was concern that banks were being too generous and forbearing too much because they didn't want to realise the losses - couldn't afford to realise the losses, the world's moved on from there and the regulatory environment and the capital environment is such that lenders have to act quickly and prudently, to protect their position. So it won't prevent possession and I think that's a dangerous road to go down. '

[Venger]

Some posts which held me together in difficult times... as the BTLer party was going full-swing... full-on crazy... and then into 2015 as well. Danced right into it.

I totally agree that these are just idle musings - but I also think that IT may have started already. If it falls far enough then timing won't be everything. UK property was flat quite a while after the late Eighties bust. If the movement is guided by the share of the stock that is late entrant BTL and highly leveraged BTL (could easily be 10% of the housing stock) the correction could be very swift. As to the consequences - I think they are oversold. If you have a recession that produces a bust in the owner-occupied sector that's one thing - but a run on a bunch of speculators? The banks can take the losses. BTLers will end up with larger mortgages on their own homes, so they'll be spending a little less, but there are only at most a million of them and really how much of an effect will the collapse of sales of twigs in vases have on the rest of the economy? As to wealth effects more generally? Well, if people are already b'rassic as they are spending all their income on mortgages and rent then they are hardly going to spend less after prices correct, because they weren't spending anything to begin with! Let's get this done!

In any falling market you'll have some 'investors' behaving the way you describe - but "the market can remain irrational longer than you can remain solvent" and all that; they are not the ones who'll decide the path of prices. Instead of focussing on sentimental mugs who are going to lose the most, I'd ask are there enough BTLers with a little more sangfroid who'll look to get whilst the going is still good, or at a later point look to stop their losses. There weren't really that many repossessions in the 2008 blip - so there can't have been that much forced selling. So who was selling to produce the market prices? Isn't it at least possible that it was partly BTLers looking to realise gains whilst they still could (and in some cases stop losses)? We may have already seen this phenomenon in action - though I accept this is speculation. However, if the speculation is on the money then next time prices start falling sharply and the BTLers respond you could see an even more pronounced effect because there are more BTLers and these late entrant BTLers will have far less bubble equity than people who got in between 2000-2003 and rode the bubble for years.

I don't care what they think it's worth, I care what it'll sell for and no individual market participant gets to decide that. Likewise, I don't care what rent they want to charge, I only care about the rent that the market will allow them to charge.

Every bubble pops and the people holding the bag at that point are the ones who are determined by reality as actually having been the greatest fools of a long chain of greater fools. We've been through the households borrowing at 5x household income on a repayment basis, we've been through the liar loan applicants borrowing at 6x-7x on a repayment basis, we've been through the interest only liar loans, we've even been through the 95% LTV IO BTLers of 2007. And now we've reached the 2013 post crisis vintage BTLer. In the South East they are putting down 25% to pay prices that are above peak. Interest rates cannot go lower. I honestly feel that these lot may be the greatest fools. They are breaking Judith Wilson's Number One Golden Rule for BTL success - never use you own money.

Would they really have any losses to take beyond reduced profit margins? The banks have already made money on these loans via interest payments (minus savings/FLS rates and operational costs) so surely we've got to include this accrued profit with the sacrificial 25% equity held by the BTLers before we can count the banks as having made a loss? This seems to leave quite a large margin for a HPC even if the banks don't get paid in full whereas, as you say, many errant BTLers would in fact just end up with larger mortgages on their own homes so both the capital amount and interest payments would still be forthcoming. In fact the banks could make more of a profit in this scenario as they'd probably be able to gouge the one time BTLer on rates, as well as having the opportunity to sell a new mortgage to whomsoever buys the old BTL property (or simply accrue a corporate rental portfolio, although this might not be such an attractive option - don't get high on your own supply and all that). Some individual BTL loans might carry a loss, although even these can be offset against profits for tax breaks, but I can't see how the banks' overall BTL books could since the majority of BTLers who borrowed or MEW'd in recent years were subject to 25% equity and existing home ownership/alternative income requirements.

First up, I agree with your idea that post-2009 BTL will not produce any material losses, even in the case of a 40% correction. However, for some loan books at some banks (particularly where the business was written at very high-LTV) I'm guessing that 40% from here would produce some red ink in some of the 2005-2008 stuff that is presently hanging on by its fingernails, but as the graphs in the OP show, with each passing year the 2005-2008 cohorts become a smaller and smaller part of the overall book. It is not unimaginable that some of the 2005-2008 lot are getting out by selling to the current lot!

As to why we've gone down this road rather than just allowing a correction, I think that you've got to recall the WTF mood of 2007-2008. The major consultation papers that led to the MMR weren't published till December 2011. I've taken the view that up to this point the regulators/technocrats 'knew' what was going on, but didn't know the gory details with sufficient confidence to win the political battle with the banks about the need for these practices to be reformed. Interest only mortgages were still being written as a mainstream product for owner-occupiers up to 2012. It takes time to turn the ship around.

As to why BTL is allowed to continue, I am also not inclined to suppose that there was a meeting in a smoke filled room where Mervyn King, chomping on a cigar and talking like James Cagney in Angels With Dirty Faces, told Osborne the plan. However, anything that shares out the risk, especially if it places it on the shoulders of those with the financial strength to bear it, was always going to be welcomed by the Treasury and the Bank of England. Likewise, the banks are placing whopping fees on this BTL stuff - £2000 a pop - and it is lent at decent rates. Given that it still falls under the FLS, the margins must be "Thank you very much!" The punters are clamouring for it, there is no political dissent because the MPs are all up to their necks in it. Likewise the journos. I agree it is emergent. However, I am inclined to believe that the regulators are on the same page as me - anyone who wants to help bail out the banks is welcome to chip in. BTL is not a regulated product. Nobody expected the regulators to stop people buying shares in Pets.com and nobody should expect the regulators to stop BTLers buying houses. As to whether the regulator should step in, or whether BTL is a political matter that should be addressed by statute law - those are different, important questions.

I think that the banks are good to go for 35%-40% off current prices. It's not price falls that produce losses - it's price falls and people failing to pay their mortgages. I seem to recall that there is no statistical link between negative equity and mortgage arrears. If people can pay their mortgages, then they do, as Carney delights in pointing out.

[Neverwhere]

When you stress test a bank you determine what is going to happen (i.e. a scenario - a certain fall in house prices, a certain level of borrowers falling into arrears and being repossessed, a certain move in interest rates) and then you wash it all through the accounts and see if the capital base was big enough to handle the bump in the road.

When you price a loan using the interest rate you ensure that a book of such loans, if they performed in line with your expectations, would still be profitable after you'd booked all the associated costs, including losses on the expected non-performing loans.

Hence when pricing loans you might make an assumption about house prices in order to assess what you'll recover on the loans that sour, but you won't make a worse case assumption. However stress testing is all about seeing how the balance sheet as a whole copes under a worst case. They shouldn't square. The naive expectation that the two should square in the way you propose depends on a pretty thoroughgoing misunderstanding of the nature of stress testing and the mechanics of pricing risk on loans.

I think another key point is that the aggressively leveraged, large portfolio BTL landlords that we're primarily talking about here are largely a hangover from the pre-financial crisis era (small portfolio or single BTL landlords with other income streams and other assets to draw upon are unlikely to present the same kinds of problems because their BTL investments can sour and they will, in the main, be able to cover all monies owed to both their lenders and HMRC - though they may have little left over for themselves).

Mainstream lenders already know full well that these loans are riskier than they first supposed, that's why they're generally not making them any more. Hence they may be inclined to develop strategies to ensure that they minimise losses from this source, but the fact that there is a higher than average risk of losses from this source is highly likely to already be well accounted for in any stress testing scenario.

Challenger banks, on the other hand, may have been engaging in riskier activity in order to gain market share. However, they are much less integrated with the wider economy and thus can almost certainly be allowed to go bust without too much fuss (we already have UKAR in place to roll them into). In fact, allowing at least one of them to do so might be seen as a useful test of current arrangements for allowing banks to manage their own insolvency and go bust in an orderly fashion.

[long time lurking]

SLS & FLS - for someone else to answer...

Well I'm looking at it with a commercial view, (shareholders and profits for banks and Gov of a HPC) rather than any 'core-voter' HPI+ forever, 'won't let it happen' / 'BTLers/homeowners are special' type view, and think we're good to go, whenever it occurs.

And evidence suggests there's a real turn on BTLers. HPI bloated homeowners... older ones, could be next. Already the BTLers (at least those who know about the changes) are reeling with astonishment, with so many of them convinced they won GE for Conservatives.

Anyone would have to agree that the PTB have their sights set on destroying leveraged IO BTL C24 is undeniable proof of that

But the extension of FLS which replaced SLS as a way of allowing banks to borrow at below market rates (compared to the rate they would get if they had to use their own collateral as security ) does not sit well with the theory that banks are that strong they can take HPC

The BOE have stated they see BTL lending as a financial stability risk and i can only assume they are talking about the bank's stability, going on past form the BOE are consistent at one thing and that's bolting the stable door after the horse has bolted the same could be said for this government concerning C24 it should have introduced five years ago

Although there are other effects to consider when trying to get a handle on the FLS situation as in it allows creditors to service their debt cheaply leaving disposable income to be spent in the economy thus increasing growth/confidence (trical down ?)

I think MMR tests are going some(with an emphasis on some) way to prevent this disposable income bidding up house prices by OO but it has failed to stop that same money bidding up HP`s via BTL infact it`s a prerequisite for some BTL mortgages to have a disposable income to qualify i think this is part of what the BOE consultation on BTL lending is trying to address

[Venger]

..I think MMR tests are going some(with an emphasis on some) way to prevent this disposable income bidding up house prices by OO but it has failed to stop that same money bidding up HP`s via BTL infact it`s a prerequisite for some BTL mortgages to have a disposable income to qualify i think this is part of what the BOE consultation on BTL lending is trying to address

Okay I am still thinking over the first part.

For the second part, they've stood back last few years and allowed the BTLers to go hard in - whilst more FTBs priced out. Those BTLers on the hook for it.

It's not failed. Deliberate. Free choice. The BTLers forever-hpiers have danced into it, and allowed the banks to offload risk to pure-greed. Onto the shoulders of those who can take the price falls.

Only now, is the pincer coming in. To the astonishment of the BTLer who actually know about it. £600K home owned outright, and newbie BTLer buys £500K 1 bed flat to rent out, a few weeks before budget. Think like a bank. It's great. You've got them. You can get your money back + loads more.

And would-be OO buyers are MMR'd. HTB ISA cooling off buyers too.

We've had BTLers on HPC brag that they were safe because they've put down 25%... and highly amusingly for me, just before the budget. £400K purchase for another BTL, thinking conditions going forwards would always continue to be so generous on the BTL side.

What makes your hand weak is that if buy-to-let mortgage rates move up sharply and a recession hits and you find that you can't secure the rents that you'd anticipated, the net cash flows on your property can turn negative. Now your work as a contractor generates income, but sometimes bad things happen..... you might find your contracting services are no longer required. The recession makes it difficult for you to get work and your buy-to-let investments, as well as sundry expenses like tissues and hand lotion, are bleeding your savings. A point would come where you might want to sell the BTLs so you could get out ahead. However, you'd find that a house price crash meant that if you sold the BTL you'd make a capital loss, (that is of course what the deposit is really for, to ensure that you and not the bank absorb the capital loss).

Hence you'd be looking at a situation where you thought the market was irrational (your BTL, in your estimation, was worth £400k, although nobody would pay you £400k for it) but the rate at which the negative cash flows and your own living expenses were bleeding out your liquid assets meant that you couldn't hold out forever because eventually you'd run out of savings to pay the mortgages on the BTLs; you would no longer be able to meet your obligations as they fell due, i.e. you would be insolvent, but sometimes the market can stay irrational longer than you can stay solvent. That is the heart of the aphorism; it's about holding on to a leveraged investment position when the market turns against you.

Late entrants are piss weak because in reality the gross yields people are signing up for are too thin to absorb much movement on rents or BTL mortgage rates, much less disadvantageous movements of both at the same time.

You've got it all back to front.

The bank demands the big deposit because they know that you are weak. Arguing that you are not weak because you've handed over a big deposit is an interesting way to look at things, but in my opinion, completely wrong headed.

It's my view the banks can handle it, but risks are on other market participants; BTLers, homeowners at higher end (no one is stopping them trying to sell with so little on the market atm)....... and of course, many other market participants - infrastructure - which could be problematic.. but lead to opportunities for others, including the banks I suggest.

The Bank of England is happy with banks, and is now worried about the rest of the financial system

If a shock hits the markets and investors rush to sell their assets, Mark Carney fears liquidity could dry up rapidly

18 Jul 2015

..But amid the possible threats to the financial system, he pointed to British banks as a strong point which can absorb and mitigate instability – a major change from the aftermath of the credit crunch. “These could cause investors to panic, leading to rapid and unexpected flows of funds which could take asset managers by surprise.”

..That means asset managers, insurers, hedge funds, central counterparties where securities are traded and settled – all important parts of the system which have not had as much focus because banks merited so much attention following the crash.

http://www.telegraph.co.uk/finance/bank-of-england/11745093/Mark-Carney-trains-his-sights-on-asset-managers.html

[Neverwhere]

Anyone would have to agree that the PTB have their sights set on destroying leveraged IO BTL C24 is undeniable proof of that

But the extension of FLS which replaced SLS as a way of allowing banks to borrow at below market rates (compared to the rate they would get if they had to use their own collateral as security ) does not sit well with the theory that banks are that strong they can take HPC

The BOE have stated they see BTL lending as a financial stability risk and i can only assume they are talking about the bank's stability, going on past form the BOE are consistent at one thing and that's bolting the stable door after the horse has bolted the same could be said for this government concerning C24 it should have introduced five years ago

Although there are other effects to consider when trying to get a handle on the FLS situation as in it allows creditors to service their debt cheaply leaving disposable income to be spent in the economy thus increasing growth/confidence (trical down ?)

I think MMR tests are going some(with an emphasis on some) way to prevent this disposable income bidding up house prices by OO but it has failed to stop that same money bidding up HP`s via BTL infact it`s a prerequisite for some BTL mortgages to have a disposable income to qualify i think this is part of what the BOE consultation on BTL lending is trying to address

That certainly looks to be the case. From The Financial Policy Committee's tools over the buy-to-let mortgage market - Impact Assessment:

This interaction between buy-to-let and owner-occupier policies can be explored using a model developed at the Bank of England that projects the loan-to-income (LTI) distribution of owner-occupier mortgages under various assumptions - including house prices - and calculates the impacts of the FPC’s LTI recommendation.⁴⁶ To illustrate the possible adverse impacts of a buy-to-let boom, the effect of an additional increase in house prices of 10% over a three year period (holding other assumptions in the model fixed) is estimated.⁴⁷ The additional house price inflation increases the share of borrowers who do not get a loan at all as a result of the LTI limit from 0.2% of the flow to 0.9%. And almost three times as many borrowers (11% compared with 4%) are forced to reduce the size of their loan.

In addition, as prices are pushed up faster, more of the mortgages of new owner-occupiers become ‘bunched’ just below the 4.5 LTI limit (Chart 4). As well as increasing the compliance costs for firms, this bunching behaviour would undermine the effectiveness of the FPC’s policy in limiting risks from owner-occupier indebtedness. To contain those risks, the FPC might need to tighten the LTI policy. If it were available to them as a power of Direction, the FPC could judge that an ICR limit on buy-to-let - in combination with existing owner-occupier policy on LTI ratios - was a more effective policy package than relying only on owner-occupier measures.

⁴⁶ For more detail about this model, see http://www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp1114.pdf

⁴⁷ The distribution of the mortgage flow depends on many variables and factors which would probably be different in a future scenario. For simplicity only the effect of prices is considered here, as this is the main channel through which the buy-to-let sector could impact the distribution of indebtedness of owner-occupiers.

Re. FLS perhaps that is one of the mechanism by which banks are strong enough to take a HPC?

[long time lurking]

That certainly looks to be the case. From The Financial Policy Committee's tools over the buy-to-let mortgage market - Impact Assessment:

Re. FLS perhaps that is one of the mechanism by which banks are strong enough to take a HPC?

That certainly looks to be the case. From The Financial Policy Committee's tools over the buy-to-let mortgage market - Impact Assessment:

Re. FLS perhaps that is one of the mechanism by which banks are strong enough to take a HPC?

Would agree it`s a possibility

There just seems to be to many conflicting polices...other than the TPTB wants rid of IO BTL in the current form an discourage future entrants it`s all a bit confusing/ contradictory

[Venger]

Would agree it`s a possibility

There just seems to be to many conflicting polices...other than the TPTB wants rid of IO BTL in the current form an discourage future entrants it`s all a bit confusing/ contradictory

As it should be.

Central Banks going back to opaque, and allowing market participants to make their own minds up.

People will say 'good time to buy most places... £450K house upsize, £350K mortgage, 3.5% - sorted - in the North'.

Pres on another thread convinced house prices can't fall and Gov stands totally behind them, diamond hard... top of the layer cake stuff.

Other people see market differently. Market.

[HTB London 40%]

It still requires buyers....

The takeup for HTB2 has been pretty slack.

Sept 2014 BTLegraph (I should really find a more uptodate source but I'm pretty confident it's still low side): The Treasury set aside £12bn-wafter year.)

Newbuild buyers buying means fewer buyers against me in secondary market.

I simply see it as 'fanfare' - to announce, to wrong-foot some by impression they stand behind wider market. It's not going to cost Gov much for a small takeup, and the buyers will be on the hook for it.

Can see the HTB announcement has affected and caught out some posters on the forum itself. GO spin that won't cost Gov much at all, imo. We make our own market decisions and maybe Gov wanted something on housing to offset the BTL/Second Homeowner measures, to smooth out, add confusion, to what is ahead - and market participants make their own buying/selling decisions.

But the moves could become a language, and Gurgeh thought he could speak that language now, well

enough (tellingly) to lie in it… so he made his moves, and at one moment, with one move, seemed to be

suggesting that he had given up… then with his next move he appeared to indicate he was determined to

take one of several players down with him… or two of them… or a different one… the lies went

on. There was no single message, but rather a succession of contradictory signals, pulling the syntax of

the game to and fro and to and fro until the common understanding the other players had reached began

to fatigue and tear and split.

-Player of Games

Dance, greed, dance in.

June 26, 2015

.... Over the past 12 months most lenders have reduced the amount they will lend based on a borrower’s income. For example, in July, Santander reduced their maximum income multiple from six times a borrower’s income to five. For first-time buyers the bank’s new cap is even lower, at four and a half times their income.

..Money asked all the major banks and building societies to submit their maximum income multiples. ...The average of all the respondents was four and half times a borrower’s salary.

In London, where the average house price is now £493,000, and the average annual wage is £35,069, according to the latest ONS data, the shortfall that borrowers would need to make up after their deposit and loan would be £285,890.

..“Even borrowers taking Help to Buy mortgages often have the amount they can borrow restricted when compared to other customers. Until house prices come down buyers will need more generous income multiples, otherwise they will be forced to rent or rely on the Bank of Mum and Dad.”

Lenders meanwhile continue to court landlords. There are now almost 700 buy-to-let loans on the market compared with fewer than 200 mortgages available for first-time buyers.

http://www.thetimes....icle4481168.ece

http://www.housepric...s/?p=1102743575

[dances with sheeple]

As it should be.

Central Banks going back to opaque, and allowing market participants to make their own minds up.

People will say 'good time to buy most places... £450K house upsize, £350K mortgage, 3.5% - sorted - in the North'.

Pres on another thread convinced house prices can't fall and Gov stands totally behind them, diamond hard... top of the layer cake stuff.

Other people see market differently. Market.

Dance, greed, dance in.

[dances with sheeple]

This is what we want to happen off the back of the new regulations no doubt? Will it happen? Let`s wait and see......

Edited January 2, 2016 by dances with sheeple

[spyguy]

I have to agree with this. I don't think lenders have a clue. If they did, they would be pricing the risk more realistically. Instead, there is no due dilligence, they just rely on LTV to do all the work. The lenders are in the business of selling money, snake oil even. They're not in the business of dissolving portfolios and chasing receivers for scraps.

My local BS was sunk and took over in 2008.

Some of the stories leaking out were insane.

They'd lent almost £1m to a a local doley to buy 'investment properties'.

He spent most of money on cars and holidays.

[Venger]

That is where reality and theory start to diverge IMO. Both parties want the BTL`er for the most part to hold his position, pay the mortgages and a bit off the top to the tax man, not to panic and flood the market with property. I don`t believe they will want to force too many into bankruptcy as this means no mortgage paid and no tax? How it plays out will depend on the sentiment of BTL`ers, I believe many will try to hold on by not declaring if they can, trying to raise rents, and generally just being in silly childish denial. Some will have moved already and be shifting property (Fungus would like people to believe he is in this camp, but I don`t believe his sort of money is on the table at this point in the game)

The banks are in a much stronger position than 2008.

Watch the PropertyTribes video with the head guy from a specialist lender. It's not going to be cuddles. There's £Trillions in profits from HPC and fresh lending to go for imo. On the widest overview of the market. Market participants are carrying much more of the risks, not the banks.

Younger renter-savers can put up with these extreme prices, but any hardship at top-of-the-layer-cake is a no, because of what... banks and core-voters etc?

I think there are a fair proportion of boomers in the professional classes who have have been shielded from the vicissitudes of the world for two generations or more They are about to find out how the world works.

And that is where your analysis diverges from reality, and the problem arises as you fail to carefully distinguish the most part of BTLers from the most part of the BTL properties. Let me explain.

The Treasury suggested 20% of landlords affected by the budget changes. BTL is about 40% the PRS, but as only BTLers are affected, all affected landlords are BTLers. If we assume that the number of landlords in either sector is in proportion to the number of dwellings in the sector then we have that the 20% affected are drawn from 40% of landlords, i.e. half the BTLers are affected

However, as ownership is concentrated in the BTL sector and the leveraged portfolio landlords are the most affected we can be fairly confident that well over half BTL properties are going to be affected by the changes.

Simply put the nature of the changes made is not consistent with your belief that most BTL propreties would continue to service their mortgages and pay a little tax off the top.

Friend in Manchester who owns his apartment (got a fair deal on it in 2008, from a BTLer who crashed out, having laid claim to loads of apartments) had his service charge hiked last year because so many of the BTLers who own in the same block, are not paying their service charges.

We're heading for a lot more of this, when the BTLer squeeze comes in - with banks totally firmed up and in position. Sell to people who can afford it at lower prices. Not leave in hands of the greedy and complacent. Banks want money. Gov wants money (and votes). Dead overvalued property and greed.

For the last year I have been faced with trying to create an income to match the outgoings I

had during the period of time before the credit crunch. I have not been able to create an

income large enough to cover those costs and as a result one of my creditors has decided that

they think they will have more chance of getting their money back by making me bankrupt.

I am at the moment looking into if there is any just cause to stop these proceedings but I do

not think that there is and as such I am likely to be made bankrupt within the next few

months.

I have many reasons for writing this but my first reason is to confirm to you that this does not

mean that the system which I described in the book is flawed. In fact the system still works

well even today and I wanted to try and reassure as many people as possible

In February 2008 I had around ten mortgage offers retracted almost overnight. In total this was

approximately £280k that was withdrawn from my immediate cash flow without notice.

We all thought these mortgage product withdrawals were just another phase of the market. I think I

joked a few times early on that the only way for this strategy to be flawed was if all the banks

stopped lending. Well, a lesson learned there!

I persisted for several months trying to release equity form other lenders but all of which

came to nothing and it was clear that equity release was no longer available. This was at a time

when I still had equity in my portfolio. However, during the winter property prices continued to fall and

even though I was only on average 67% borrowed at the start of the credit crunch it now looked from

an actual ‘sell all’ perspective that the whole portfolio was in negative equity.

So we shut off all loan payments and told our creditors that we would look to find ways of starting to make interest

payments to them, but that capital payments were not possible as we could not roll over our

loans. We asked for their help and understanding whilst apologising for our part in the

situation we were in.

Most understood, no one was happy about it of course, some were angry and some were very

angry, but I said that my ability to make money was not gone, just my ability to roll over my

loans. I explained that if they did take action then they would be unlikely to get any money at all and would almost certainly

lose all of their money, but that more importantly there were people I had borrowed from that

were in a far worse situation than them and that if they proceeded with this then they would

certainly cause the loss of all of their money as well.

In effect they are making me sell at a time like the early nineties which was clearly the worst

time to sell, as it is now. Anyone who sold property at that time lost money, whereas all that

were able to hang on were able to sell or refinance when the market recovered. Whereas, one day the property market

would recover in a way that would allow me to repay their capital and in the meantime, I

would trade and pay over all profits made above reasonable living costs.

[dances with sheeple]

One for the renters, bags and boxes might need to be packed folks for when the SHTF in portfolio land.........

[Bland Unsight]

Edit to ad a genuine question ...whats the differenc between SLS and FLS other than the acronym?

First up, not much. The Special Liquidity Scheme (SLS) was a collateral swap (basically crappy mortgage backed securities for gilts). The Funding for Lending Scheme (FLS) is the same deal. The key difference is really rationale; SLS was about enabling UK banks to borrow in order to avoid becoming insolvent (one way to repay your existing creditors is to replace old creditors with new creditors) and FLS is about enabling UK banks to borrow cheaply in order to recapitalise.

SLS launches in April 2008 in the teeth of the credit crunch. At this point it is a question of whether the money markets will lend to UK banks at all, the question of whether the rates are punishing doesn't even come into it. Between 2008 and January 2012 the amount of bills borrowed under the SLS falls back to nothing, see Figure 1 here. The game here is really how the banks fund their balance sheets, i.e. who lends them the money they lend to borrowers. The banking system as a whole creates new credit money, but each bank individually does act as an intermediary between savers and borrowers. By June 2012 the Bank of England was quite sanguine regarding the progress that had been made with regard to the ability of the banks to fund their lending.

UK banks have further reduced their reliance on wholesale funding. All of the approximately £185 billion of Treasury bills advanced under the Bank’s Special Liquidity Scheme (SLS) have been repaid. Government-guaranteed debt issued under the Credit Guarantee Scheme has fallen 95% from its peak of around £140 billion. Non-core asset reduction and customer deposit growth has meant that a large proportion of maturing funding has not needed to be replaced in wholesale markets. This is reflected in a further narrowing of the customer funding gap — the difference between customer deposits and loans — to under £200 billion. There has been a cumulative reduction in this funding gap of around £700 billion from its 2008 peak

Source: June 2012 FSR

FLS which launches in July 2012 is about generating bank profits for the purposes of improving the amount of capital that the banks hold.

The aggregate core Tier 1 capital ratio of the major UK banks has increased by over 50 basis points since the Committee first encouraged banks to build capital in 2011. But over the same period, the aggregate level of core Tier 1 capital of the major UK banks has increased only marginally, and that is more than accounted for by the retained profits of a single bank. And the outlook for internal capital generation through retained profits remains challenging (as discussed in Section 2). Against this backdrop, the FSA wrote to the major UK banks in August asking them to provide quantitative estimates of all feasible options for increasing capital levels further or restructuring their business models. Recent supervisory discussions have focused on banks’ responses to this letter and actions are being taken as a result of these discussions. These include ensuring that banks’ proposals for variable remuneration and dividends are consistent with building capital levels.

Source: November 2012 FSR, (emphasis added)

[long time lurking]

First up, not much. The Special Liquidity Scheme (SLS) was a collateral swap (basically crappy mortgage backed securities for gilts). The Funding for Lending Scheme (FLS) is the same deal. The key difference is really rationale; SLS was about enabling UK banks to borrow in order to avoid becoming insolvent (one way to repay your existing creditors is to replace old creditors with new creditors) and FLS is about enabling UK banks to borrow cheaply in order to recapitalise.

SLS launches in April 2008 in the teeth of the credit crunch. At this point it is a question of whether the money markets will lend to UK banks at all, the question of whether the rates are punishing doesn't even come into it. Between 2008 and January 2012 the amount of bills borrowed under the SLS falls back to nothing, see Figure 1 here. The game here is really how the banks fund their balance sheets, i.e. who lends them the money they lend to borrowers. The banking system as a whole creates new credit money, but each bank individually does act as an intermediary between savers and borrowers. By June 2012 the Bank of England was quite sanguine regarding the progress that had been made with regard to the ability of the banks to fund their lending.

Source: June 2012 FSR

FLS which launches in July 2012 is about generating bank profits for the purposes of improving the amount of capital that the banks hold.

Source: November 2012 FSR, (emphasis added)

So i was roughly right they both achieve the same thing (suppress IR`s) there or there abouts but achieve it in a slightly different way

I look at the above and see a description of a banking system that would be borrowing from the open market using their own capital as collateral at a far higher rate than they are currently paying using FLS (am i reading that right)

That does not paint a picture of a banking system that's capable of taking a major hit on their mortgage books , stronger yes but nowhere near full health