Just found the cause of the next crash

[Houdini]

Someone has just pointed me at https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ which is an outline of who and what caused the US version of the crash in 2007 and sub prime lending isn't the cause..

If correct the cause of the next crash is the income tax changes and S24 ....

 

[Sancho Panza]

3 hours ago, Houdini said:

Someone has just pointed me at https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ which is an outline of who and what caused the US version of the crash in 2007 and sub prime lending isn't the cause..

If correct the cause of the next crash is the income tax changes and S24 ....

 

Housing markets have many players.

Sub Prime was a problem in the US and it made up a substantial portion of demand in 2002-2008.

Fllipers were too.Between them they may have accounted for 20%/30% of transactions,maybe even more.

Losing a huge chunk of liquidity will cause most markets that are elevated to crash.

' Come 2007, investors accounted for 43% of the total mortgage balance for the top credit-score quartile. For the middle two quartiles, speculators were responsible for around 35% in 2007. '

Edited September 4, 2017 by Sancho Panza

[Sancho Panza]

 

Here's Mark Hanson talking sub prime back in the day.5 months before Lehman popped.

 

 

 

[eric pebble]

3 hours ago, Sancho Panza said:

Here's Mark Hanson talking sub prime back in the day.5 months before Lehman popped.

 

 

 

PREDATORY LIAR LOANS

THE KEY WEAPON OF MASS DESTRUCTION

 

NOTHING MUCH HAS CHANGED SINCE THE LAST CRASH....  NOTHING HAS CHANGED!!!

 

IT''S ALL JUST RE-PLAYING....

Edited September 4, 2017 by eric pebble

[Sancho Panza]

54 minutes ago, eric pebble said:

PREDATORY LIAR LOANS

THE KEY WEAPON OF MASS DESTRUCTION

 

NOTHING MUCH HAS CHANGED SINCE THE LAST CRASH....  NOTHING HAS CHANGED!!!

 

IT''S ALL JUST RE-PLAYING....

They've just found a new patsy...the BTL LL....75% IO,125% rental cover......yada yada yada.

[Sancho Panza]

56 minutes ago, eric pebble said:

PREDATORY LIAR LOANS

THE KEY WEAPON OF MASS DESTRUCTION

 

NOTHING MUCH HAS CHANGED SINCE THE LAST CRASH....  NOTHING HAS CHANGED!!!

 

IT''S ALL JUST RE-PLAYING....

It's just quite incredible what Lehman got up to.....

[maverick73]

4 minutes ago, Sancho Panza said:

It's just quite incredible what Lehman got up to.....

They were not alone, it's only after they collapsed, central banks and governments swooped in to the rest before the system died.

[Princekie]

Add a huge dose of unfavorable demographics, stagnating economy, record debt and low net migration to the mix..... 

[leonardratso]

oh dear this forum as a whole is getting like zerohedge, sheer doom porn. most depressing.

never mind lets see how bit coin is doing.... ...holy cow..... looking purdy turdy.

 

'tis but a scratch sir.

 

Edited September 4, 2017 by leonardratso

[Arpeggio]

Good video Sancho. Lehmans in Layman's terms. He explains it well enough.

[Sawitcoming]

15 hours ago, leonardratso said:

oh dear this forum as a whole is getting like zerohedge, sheer doom porn. most depressing.

never mind lets see how bit coin is doing.... ...holy cow..... looking purdy turdy.

 

'tis but a scratch sir.

 

Always has been since I have been here. Not sure your comment is appropriate on this thread though. What we have presented here is some interesting research into the actors involved and importantly dispelling some myths around the causes of the 2007/2008 crash. No doom and gloom, just accurate information. 

[Neverwhere]

On 04/09/2017 at 4:27 PM, Sancho Panza said:

Here's Mark Hanson talking sub prime back in the day.5 months before Lehman popped.

It's striking how much of that is directly applicable to current Buy-To-Let lending in the UK, given the underlying income supporting the loan is that of the tenant, so is never even asked about, let alone verified.

BTL effectively allows lenders to sidestep any consideration of whether the loan is safe or sustainable in relation to the wages that will actually be paying it, and so they lend more against those wages than is safe or sustainable.

(This is almost by definition as in order to secure properties to rent to people earning local wages BTLers first have to outbid people earning local wages who would prefer to own, i.e. the vast majority of private tenants.)

Because, as with UK residential mortgages generally, BTL is recourse lending, lenders likely feel that they can recoup any resultant losses from the BTLer's own home and other income.

However, this is plainly not the case for mid- to large-scale portfolio landlords, who are unlikely to have enough by way of other assets or income to cover the full risk of losses that their portfolios of debt represent, making the failure to consider how sustainable those debts are in relation to the wages that are actually supporting them particularly reckless.

[Neverwhere]

On 04/09/2017 at 1:02 PM, Houdini said:

Someone has just pointed me at https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ which is an outline of who and what caused the US version of the crash in 2007 and sub prime lending isn't the cause..

Quote

'This set up a dangerous dynamic. The mortgages these prime borrowers were able to secure were much bigger than those taken out by poor homebuyers. Worse, speculators have less incentive to hold onto their extra homes than those who only own one home. So when the housing market started tumbling and the economy soon followed, they were much more willing to default and foreclose [. . .] as the researchers put it, “the rise in mortgage delinquencies is virtually exclusively accounted for by real estate investors.” The share of single-mortgage borrowers who couldn’t keep up on their loan payments barely budged between 2005 and 2008.'

This 2010 paper from the Richmond Fed seems like it might potentially tie-in (though I've not read it recently so I'm not sure if it covers all residential borrowers or just homeowners):

Quote

Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States

We analyze the impact of lender recourse on mortgage defaults theoretically and empirically across U.S. states. We study the effect of state laws regarding deficiency judgments in a model where lenders can use the threat of a deficiency judgment to deter default or to shorten the default process. Empirically, we find that recourse decreases the probability of default when there is a substantial likelihood that a borrower has negative home equity. We also find that, in states that allow deficiency judgments, defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu of foreclosure.

[. . .]

Our finding that recourse deters some borrowers from defaulting indicates that a non-negligible portion of U.S. mortgage default is in fact strategic rather than involuntary, whereby borrowers have no choice but to default because of liquidity constraints. This finding contrasts with the view that mortgage defaults are primarily driven by shocks to the borrower's ability to pay (see, for example, Foote, Gerardi, and Willen [2008]). Based on their analysis of a rich dataset from Massachusetts, Foote, Gerardi, and Willen (2008) conclude that negative equity is not a sufficient condition for default. However, Massachusetts is a recourse state, and analyzing data only from recourse states gives an incomplete picture of the role of negative equity in the borrowerís default decision. As our findings show, the borrower's decision to default in recourse states is substantially less sensitive to negative equity than in non-recourse states. Guiso, Sapienza, and Zingales (2009) and Bhutta, Dokko, and Shan (2010) also find that at least some portion of default is not due to liquidity constraints.

[. . .]

Empirically, we find that, in a sample of loans originated between August 1997 and December 2008, at the mean value of the default option at the time of default, the probability of default is 32% higher in non-recourse states than in recourse states. The deterrent effect on default is significant only for borrowers with appraised property values of $200,000 or more at origination. At the mean value of the default option at the time of default and for homes appraised at $300,000 to $500,000, borrowers in non-recourse states are 81% more likely to default than borrowers in recourse states. For homes appraised at $500,000 to $750,000, borrowers in non-recourse states are more than twice as likely to default as borrowers in recourse states while, for homes appraised at $750,000 to $1 million, borrowers in non-recourse states are 60% more likely to default. We also find that recourse deters default on loans held privately; we cannot reject the hypothesis that recourse does not have an effect on loans held by the government sponsored enterprises. Finally, we find that allowing lenders recourse increases the likelihood that default occurs by a more lender-friendly method, such as a deed in lieu of foreclosure.

 

[Sancho Panza]

On 9/4/2017 at 10:20 PM, leonardratso said:

oh dear this forum as a whole is getting like zerohedge, sheer doom porn. most depressing.

never mind lets see how bit coin is doing.... ...holy cow..... looking purdy turdy.

 

'tis but a scratch sir.

 

 This website was like zerohedge before zerohedge existed.

Can't believe you're posting on a website called housepricecrash moaning about how all the posters think house prices are going to crash.Surreal.

Edited September 6, 2017 by Sancho Panza

[Sancho Panza]

1 hour ago, Neverwhere said:

It's striking how much of that is directly applicable to current Buy-To-Let lending in the UK, given the underlying income supporting the loan is that of the tenant, so is never even asked about, let alone verified.

BTL effectively allows lenders to sidestep any consideration of whether the loan is safe or sustainable in relation to the wages that will actually be paying it, and so they lend more against those wages than is safe or sustainable.

(This is almost by definition as in order to secure properties to rent to people earning local wages BTLers first have to outbid people earning local wages who would prefer to own, i.e. the vast majority of private tenants.)

Because, as with UK residential mortgages generally, BTL is recourse lending, lenders likely feel that they can recoup any resultant losses from the BTLer's own home and other income.

However, this is plainly not the case for mid- to large-scale portfolio landlords, who are unlikely to have enough by way of other assets or income to cover the full risk of losses that their portfolios of debt represent, making the failure to consider how sustainable those debts are in relation to the wages that are actually supporting them particularly reckless.

1) That's an excellent point Neverwhere.Hadn't really thought of it like that.

2) I'm genuinely amazed at the amount of LL's I know and have met who don't know what S24 is.Even more are completely unaware that their homes and salaries are underpinning their loans.

 

[adarmo]

33 minutes ago, Sancho Panza said:

1) That's an excellent point Neverwhere.Hadn't really thought of it like that.

2) I'm genuinely amazed at the amount of LL's I know and have met who don't know what S24 is.Even more are completely unaware that their homes and salaries are underpinning their loans.

 

1) I'm not sure it is such a good point. Firstly, the banks will look at the potential rental income and you'll need a % over the monthly payments. In addition the tenant's income is verified by the leaching Lettings Agency to ensure the rent is affordable. The deposit ensures that should they default at least some of the back rent is recovered. Then there's the obvious bit about the 25% deposit required on BTL so even if the LL did default the bank would most likely be returning some money to the LL after selling at a discount and covering their 'admin fees'. In an all out crash accompanied by mass unemployment and/or exodus of people renting then yes it would cause big problems. Maybe Brexit will see to that. 

2) Most that I've spoken to are vaguely aware of tax reliefs going but they don't seem to understand the detail. I even know one guy who inherited a bungalow and actively remortgaged his half to take some cash out (I have a feeling at least some of it went into t!tcoin). Ultimately they are on the hook for the mortgage should things go seriously wrong (maybe right from our perspective) but what's underpinning the repayment is the rental income and if that fails then the banks have an asset to seize against a mortgage allegedly worth 75% max on the asset. If they've incorporated then different story. 

[Neverwhere]

29 minutes ago, Sancho Panza said:

1) That's an excellent point Neverwhere.Hadn't really thought of it like that.

It's like a "Don't ask, don't tell" version of liar loans, in which the lender conveniently pretends that the (tenant's) wages supporting the loan are completely irrelevant to how safe or sustainable the loan is, and so don't even ask for the information in the first place.

2 minutes ago, adarmo said:

1) I'm not sure it is such a good point. Firstly, the banks will look at the potential rental income and you'll need a % over the monthly payments. In addition the tenant's income is verified by the leaching Lettings Agency to ensure the rent is affordable. The deposit ensures that should they default at least some of the back rent is recovered. Then there's the obvious bit about the 25% deposit required on BTL so even if the LL did default the bank would most likely be returning some money to the LL after selling at a discount and covering their 'admin fees'. In an all out crash accompanied by mass unemployment and/or exodus of people renting then yes it would cause big problems. Maybe Brexit will see to that. 

Rents can be unsustainably high in relation to wages and prudent lending means planning for periodic economic downturns. That's the point.

Lettings agencies check that the rent is payable, not that it is affordable. They don't care if someone ends up paying an unsustainable amount of their income in rent that leaves them with no room to develop a savings buffer with which to weather periods of personal financial or wider economic hardship, and yet these things may easily occur over the course of a normal mortgage, let alone an interest-only Buy-To-Let loan which is predicated on continual remortgaging and never really intended to be paid off.

If letting agencies actually checked for affordability to the same degree as is deemed safe in the owner-occupier mortgage market then we wouldn't end up with situations like this:

Quote

A shortage of affordable housing is leaving a generation stuck in a “rental logjam”, warns the Local Government Association (LGA) today. Its new analysis show that almost one in seven private renters (14 per cent) are spending more than half of their total income on rent, in stark contrast to just 2 per cent of homeowners on their mortgage.

(Also, BTL loans can still be had at higher LTVs than 75%, see Kent Reliance's 85% offering for instance, and mid- to large-scale porfolio building tends to involve repeated Mortgage Equity Withdrawal, so much of the notional buffer on earlier acquisitions may actually be owed in Capital Gains Tax, and in the event of bankruptcy HMRC will go to the front of the queue ahead of the lenders.)

[Pop321]

5 hours ago, Neverwhere said:

It's like a "Don't ask, don't tell" version of liar loans, in which the lender conveniently pretends that the (tenant's) wages supporting the loan are completely irrelevant to how safe or sustainable the loan is, and so don't even ask for the information in the first place.

Rents can be unsustainably high in relation to wages and prudent lending means planning for periodic economic downturns. That's the point.

Lettings agencies check that the rent is payable, not that it is affordable. They don't care if someone ends up paying an unsustainable amount of their income in rent that leaves them with no room to develop a savings buffer with which to weather periods of personal financial or wider economic hardship, and yet these things may easily occur over the course of a normal mortgage, let alone an interest-only Buy-To-Let loan which is predicated on continual remortgaging and never really intended to be paid off.

If letting agencies actually checked for affordability to the same degree as is deemed safe in the owner-occupier mortgage market then we wouldn't end up with situations like this:

(Also, BTL loans can still be had at higher LTVs than 75%, see Kent Reliance's 85% offering for instance, and mid- to large-scale porfolio building tends to involve repeated Mortgage Equity Withdrawal, so much of the notional buffer on earlier acquisitions may actually be owed in Capital Gains Tax, and in the event of bankruptcy HMRC will go to the front of the queue ahead of the lenders.)

I agree with Mr Panza some really good points by Neverwhere. 

The US situation was driven by poor loans on cheap fixed rates which were dropping onto unaffordable SVRs in 2007. The borrowers could no longer refinance and the SVR was not viable due to MEWing and the deck of cards collapsed. 

The 118 portfolio guys are in the exact same position and S24 is turning the screw BEFORE rates inevitably rise. S24 probably was intended to be a simple 'tax' to raise much needed money but it also serves (intentionally or otherwise) as a warning to a 118'er entitled and fearless borrow that debt requires respect or it can ruin you. Interest only leveraging is a short term tool in a rising market and can work....it is not a long term business plan. 

I know leveraged landlords and most have not seen this coming yet. I know cash landlords and they have...they think it's basic property 101. S24, a rate rise and maybe a scattering in Brexit in the mix makes it worth waiting for a HPC to remove any of the regional mad gains seen over the last 10 years.

[Bland Unsight]

6 hours ago, adarmo said:

1) I'm not sure it is such a good point. Firstly, the banks will look at the potential rental income and you'll need a % over the monthly payments. In addition the tenant's income is verified by the leaching Lettings Agency to ensure the rent is affordable. The deposit ensures that should they default at least some of the back rent is recovered. Then there's the obvious bit about the 25% deposit required on BTL so even if the LL did default the bank would most likely be returning some money to the LL after selling at a discount and covering their 'admin fees'. In an all out crash accompanied by mass unemployment and/or exodus of people renting then yes it would cause big problems. Maybe Brexit will see to that. 

The fact that percentage of BTLs where the tenants are in arrears is at something like 10% (according to Patient London FTB's graphs of the HomeLet stats) shows the weakness of this argument.

The fact that the bank may get something back when they foreclose doesn't change the nature of the borrowing (i.e. its quasi sub-prime character). To un-muddle your thinking a bit I would point out that the fact that there is collateral (the house) was the reason that the banks were willing to make sub-prime loans (and describe them as sub-prime) pre-2008. (To drive home the point, if the LTV was part of establishing whether or not the loan was sub-prime then falling house prices would make prime loans into sub-prime loans; but we don't think about it that way because when we talk about sub-prime loans we are talking about the ability of the borrower to keep up the commitments they made under the terms of the loan and not the likely extent of the bank's losses if it all goes wrong.)

Definitely something interesting going on with respect to portfolio size and the extent to which the loans may walk and talk like sub-prime. 

2) Most that I've spoken to are vaguely aware of tax reliefs going but they don't seem to understand the detail. I even know one guy who inherited a bungalow and actively remortgaged his half to take some cash out (I have a feeling at least some of it went into t!tcoin). Ultimately they are on the hook for the mortgage should things go seriously wrong (maybe right from our perspective) but what's underpinning the repayment is the rental income and if that fails then the banks have an asset to seize against a mortgage allegedly worth 75% max on the asset. If they've incorporated then different story. 

(Emphasis added)

How is that then? 

[Pop321]

I mentioned Neverwhere and Mr Panza. But should have acknowledge a great post and find in the first place by original poster. 

For me it further clarified it is not the borrower who is 'subprime' it is the debt itself. Ie low income, one mortgage, struggling to get by...that's a long term situation that has always existed...thode loans aren't great but the economy factors it in. The subprime was speculation and leveraging which bring the % of poor loans to an unacceptable level based on greed and prices which are not underpinned. And I see that in the UK today.....it's just a question if time. 

[jiltedjen]

7 hours ago, adarmo said:

2) Most that I've spoken to are vaguely aware of tax reliefs going but they don't seem to understand the detail. I even know one guy who inherited a bungalow and actively remortgaged his half to take some cash out (I have a feeling at least some of it went into t!tcoin). Ultimately they are on the hook for the mortgage should things go seriously wrong (maybe right from our perspective) but what's underpinning the repayment is the rental income and if that fails then the banks have an asset to seize against a mortgage allegedly worth 75% max on the asset. 

+1 every BTL landlord i have spoken to either has no idea whats coming, or briefly 'saw something in the news', but they have also made the assumption its no big deal: (actual words now)

'BTL is a sure-fire win obviously, no-way will anyone ever loose money on it'
'All my mates with BTL are doing really well, i cant see them ever having any money troubles' 
'i'm not selling for at least 20 years its my pension' 

Can't wait for the tax bills to land, when you try and actually explain whats coming they look at you like your talking total rubbish, its like what your saying is unthinkable and totally impossible magical thinking.  It's painful but at least i get to relish in their brown pants moment with a knowing unspoken 'i told you so'.

 These people are not sophisticated investors at all. End of 2018 is going to be a mass of forced sellers. 

[BorrowToLeech]

9 hours ago, Neverwhere said:

Because, as with UK residential mortgages generally, BTL is recourse lending, lenders likely feel that they can recoup any resultant losses from the BTLer's own home and other income.

It's also a loan to a 'business', using the 'business' itself as collateral.   If the landlord can't pay the mortgage, it's likely that the house isn't worth much, and vice versa, so that collateral really isn't as good as it seems.

NB: Landlording isn't a business.

Edited September 7, 2017 by DrBuyToLeech

[adarmo]

1 hour ago, Bland Unsight said:

(Emphasis added)

How is that then? 

Maybe my point want clear there but the veil of corporation could only be lifted in some circumstances therefore if the landlord had incorporated then his own home and earnings would not be on the hook. However, said LL would be using business loans instead of BTL.

My earlier point on Neverwhere was that it's not the landlords earnings that underpin the BTL mortgage, it is the expected rental value. Of course rents can move (they seem to be falling marginally). Regarding then being sub prime my understanding is that it relates to lending to people with very poor credit histories and income out of touch with the mortgage payments that is to say high risk from the lenders point of view. BTL is a bit chicken and egg in that respect because there's no income until after the loan is agreed.

10% of rents are in arrears v 90% that presumably are not so would we be saying that those 10% btl (if mortgaged) are sub prime? If part of an incorporated portfolio then surpluses from other properties could meet the mortgage payments. If it's mom and pop BTL then naturally they'd be meeting any shortfall on that i agree. 

[Houdini]

1 hour ago, jiltedjen said:

'BTL is a sure-fire win obviously, no-way will anyone ever loose money on it'
'All my mates with BTL are doing really well, i cant see them ever having any money troubles' 
'i'm not selling for at least 20 years its my pension' 

Can't wait for the tax bills to land, when you try and actually explain whats coming they look at you like your talking total rubbish, its like what your saying is unthinkable and totally impossible magical thinking.  It's painful but at least i get to relish in their brown pants moment with a knowing unspoken 'i told you so'.

Most people believe that what was true last week / year will hold true forever more. Witness from another thread the people made redundant after 30 years who could have retired but instead were up to their eyes in debt.

51 minutes ago, adarmo said:

Regarding then being sub prime my understanding is that it relates to lending to people with very poor credit histories and income out of touch with the mortgage payments that is to say high risk from the lenders point of view. BTL is a bit chicken and egg in that respect because there's no income until after the loan is agreed.

I think the use of the word subprime allowed people to find an excuse that isn't the full picture. The reality is that things change slightly and the consequences of that change were bigger than expected. Its the butterfly flapping effect.

Here we have a market based on interest only loans where the amount borrowed is based on artificially low interest rates and artificially high borrowers income (as rental income is allowed within the borrower's income) alongside the assumption that things will continue this way forever (see my first point). Yet we already know that this isn't true - mortgage lending rules are tightening, S24 is reducing income totals and the previous 2 year fixed rate loan is about to expire...

 

 

[Bland Unsight]

11 hours ago, adarmo said:

Maybe my point want clear there but the veil of corporation could only be lifted in some circumstances therefore if the landlord had incorporated then his own home and earnings would not be on the hook. However, said LL would be using business loans instead of BTL.

That's not how that works. As per Mortgage for Business.

Quote

Q. Will I have to provide a personal guarantee if I take out a limited company buy to let mortgage?

A. Yes. All lenders will require that the directors/majority shareholders provide personal guarantees.

Source

Whilst I'm not a big fan of David Whittaker and Mortgages for Business they are leading incorporated BTL mortgage broker and I've never seen any evidence that they don't know their onions when it comes to the mortgage products they broker.

I remember back in the day as a manager at a small media company all the the directors had to give personal guarantees just to lease a photocopier. These muppets are on the hook, they'll have resoundingly 'pierced the corporate veil' themselves by signing a personal guarantee.