Equity Loan is even more of a time-bomb than you thought

[BorrowToLeech]

On 05/07/2018 at 21:13, Horseradish said:

The FT makes the convincing argument that the RPI (Retail Price Index) is a crappy measure of inflation,

Is their argument ‘well I had a free education, my house cost pretty much nothing, and I don’t even know what a defined contribution pension is, so those things definitely don’t count’?

[Wayward]

4 hours ago, MinistryMan said:

 

Basically, they sh*t themselves when I raised it and were incredibly interested in the possible scenario playing out, telling me I am the first person ever to raise it.

I find this very difficult to believe...? Where they all under 21 years old.? Everyone knows the price of houses is volatile...they surge and crash...and again.

[iamnumerate]

13 hours ago, Wayward said:

I find this very difficult to believe...? Where they all under 21 years old.? Everyone knows the price of houses is volatile...they surge and crash...and again.

Have you never met anyone who believes you cannot lose on bricks and mortar?  I have and they were reasonably educated.

[winkie]

Quote

The FT makes the convincing argument that the RPI (Retail Price Index) is a crappy measure of inflation,

There are different indexes that suit different people under different circumstances.....there are some who would like to do away with the RPI completly because it is costly for them.....?

[Si1]

2 hours ago, iamnumerate said:

Have you never met anyone who believes you cannot lose on bricks and mortar?  I have and they were reasonably educated.

+10^999999999

[Wayward]

3 hours ago, iamnumerate said:

Have you never met anyone who believes you cannot lose on bricks and mortar?  I have and they were reasonably educated.

I have never met anyone who didn't realise the price of houses can fall - no.  A lot of folk think over the long term the trend is always up as the evidence to date supports but they all understood they can crash before recovering (possibly very slowly).  The idea that price falls never occurred to the folk Ministryman is referring to I find very difficult to believe.  Why the h3ll do they think the deposit is needed in the first place!!!

[iamnumerate]

56 minutes ago, Wayward said:

I have never met anyone who didn't realise the price of houses can fall - no.  A lot of folk think over the long term the trend is always up as the evidence to date supports but they all understood they can crash before recovering (possibly very slowly).  The idea that price falls never occurred to the folk Ministryman is referring to I find very difficult to believe.  Why the h3ll do they think the deposit is needed in the first place!!!

Wow you are very lucky or unlucky.

[Si1]

1 hour ago, Wayward said:

  A lot of folk think over the long term the trend is always up as the evidence to date supports 

Really? Which evidence? Peer reviewed? Statistically sound?

[janch]

23 hours ago, MinistryMan said:

Hi,

New poster here.  Sorry for not saying hello elsewhere sooner - been lurking for probably 10 years or more!

I've just had this very debate, this afternoon, with HTB Wales in Cardiff who rang me back when I posed the question...took them 2 hrs mind!

It went something like, "thank you sir, that question has never been put to us before.  Isn't it a crazy thought house prices might go down instead of up and the loan not paid back".  I've got to say the lady was really very helpful, polite and interested!

She went on to say, having spoken to her manager, should houses fall in value or negative equity ensue, all cases will be treated on a case-by-case basis, but under no circumstances will the equity loan be written off.  She could not say what proportion would be payable of the equity loan, but its most likely they would accept an agreed minimum amount to cover admin costs, but because they feel the scenario is so unlikely, she said they have never thought to look in to it.

She also said the question will be put to the HTB Wales board by her manager and they will be in contact if further info needed.  They are deeply concerned this scenario could occur and have no written instruction in place to manage any queries over it.

Basically, they sh*t themselves when I raised it and were incredibly interested in the possible scenario playing out, telling me I am the first person ever to raise it.

But this is WALES!!  The WAG (Welsh Assembly Government) probably have different rules from England. 

[Neverwhere]

Quote

Help to Buy – Wales Buyer’s Guide

What happens if property values fall? Will I have to repay the full amount of Help to Buy – Wales assistance or just a percentage of the total sale proceeds?

When you sell your home, (unless you have repaid the HtBW shared equity loan previously) the HtBW shared equity loan document commits you to repay a percentage of the market value equal to the percentage contribution of assistance received.

This means if the market value of your property falls below the level at which it was first purchased, you will repay less than the original amount HtBW contributed to the original purchase.

You must always show that the proposed sale value is at the prevailing market value before proceeding with the sale. HtBW must approve the sale before allowing the second charge to be released.

As long as you have complied with all your obligations in the HtBW shared equity loan, you will not be required to provide for any shortfall in the shared equity loan if you sell when values have fallen.

If you do not comply with the terms of the HtBW shared equity loan, HtBW will seek to recover all the money they are owed. Your solicitor will explain the HtBW shared equity loan document to you before the property is purchased.

(Emphasis added)

[Neverwhere]

The interesting part is that the HTB Equity Loan appears to only be written off if a no/negative equity borrower sells.

If they decide to stay put then they still have to repay it.

Hence, Help To Fire Sale.

[Si1]

56 minutes ago, Neverwhere said:

The interesting part is that the HTB Equity Loan appears to only be written off if a no/negative equity borrower sells.

If they decide to stay put then they still have to repay it.

Hence, Help To Fire Sale.

That's the interesting possible unintended consequence - this could crash the market hard.

I wonder if mortgage companies might begin advising under water borrowers to cash in like this. I wonder if specialist legal advisers would spring to to, erm, help out.

Edited July 13, 2018 by Si1

[Neverwhere]

1 minute ago, Si1 said:

That's the interesting possible unintended consequence - this could crash the market hard.

HTB sales have to be agreed by the HCA, so in a HPC they might end up being price-takers rather than price-setters, but the incentive to sell does seem like it could bring more properties to market than would otherwise be the case, contributing to further price falls via that mechanism, especially where there is a high concentration of HTB locally.

The valuation requirements highlighted by FreeTrader could prove a stumbling block to their actually selling though?

 

[Si1]

12 minutes ago, Neverwhere said:

HTB sales have to be agreed by the HCA, so in a HPC they might end up being price-takers rather than price-setters, 

 

In that case people would be trapped in their houses, trapped paying both the mortgage and the htb monthly charges.

Edited July 13, 2018 by Si1

[Neverwhere]

10 minutes ago, Si1 said:

In that case people would be trapped in their houses, trapped paying both the mortgage and the htb monthly charges.

It might all depend on how realistic RICS valuations are in a falling market <shrugs>

Either way the optics wouldn't look good for the government.

[stop_the_craziness]

12 hours ago, Si1 said:

In that case people would be trapped in their houses, trapped paying both the mortgage and the htb monthly charges.

Surely that was the whole point of HTB in the first place?  Panic the plebs into buying an over-priced new build that they can never sell so that you can rinse them for a lifetime of slavery?  Keep the prices up, sell the next lot of new builds to the next round of mugs for even more and keep your Tory-donor housebuilding mates going strong.

Trebles all round isn't it?  Just Call Me Dave.  (or Gideon)

 

[Si1]

13 minutes ago, stop_the_craziness said:

Surely that was the whole point of HTB in the first place?  Panic the plebs into buying an over-priced new build that they can never sell so that you can rinse them for a lifetime of slavery?  Keep the prices up, sell the next lot of new builds to the next round of mugs for even more and keep your Tory-donor housebuilding mates going strong.

Trebles all round isn't it?  Just Call Me Dave.  (or Gideon)

 

Quite

[maverick73]

All these loans are packaged up into a nice AA++ primer and sold on as a CDO ?

[Quicksilver]

If you take the full cynical HPC view, then buying a 600K HTB new build with the distinct view to "rent" it for 5 years, then walk away form it after a 40% price drop losing just your Deposit, Repayments and SDLT, I did some basic number crunching on this:

£30K Deposit & £20K SDLT at 4% Opp Loss per year over 5 years = £61K Opp Loss

Repayments made on captial on a 1.94% 5 year fix = £42.5K

Service Charges average of £200 a month = £12K

Total running cost + losses = £115.5K or £1925 PCM

So the absolute worst case scenario is 2K a month cost to buy a place and walk away after 5 years. If said 600K flat could be rented for LESS than £2K PCM over that period it makes sense NOT to buy. (That is a 4% Yield so quite realistic in London)

 

Conclusion: FINELY balanced option but swings in HTB favour as you have 5 years security of tenure, can decorate to your hearts content and dont have to deal with a Landlord.

 

Now for me, 600K gets you junk in London so I wouldnt bite, and my budget is higehr than this, AND I would like a proper house not a 2 bed showbox, but for a young twenty something this is a tempting option as requires relatively little cash down up front.

 

[mathschoc]

And there it is, the biggest incentive for the dumb ass***** in government to keep property prices high. They don’t want to be punished for HTB.

They will come up with some sort of scheme, I can’t see how anything will help them now.

[Si1]

11 hours ago, Quicksilver said:

If you take the full cynical HPC view, then buying a 600K HTB new build with the distinct view to "rent" it for 5 years, then walk away form it after a 40% price drop losing just your Deposit, Repayments and SDLT, I did some basic number crunching on this:

£30K Deposit & £20K SDLT at 4% Opp Loss per year over 5 years = £61K Opp Loss

Repayments made on captial on a 1.94% 5 year fix = £42.5K

Service Charges average of £200 a month = £12K

Total running cost + losses = £115.5K or £1925 PCM

So the absolute worst case scenario is 2K a month cost to buy a place and walk away after 5 years. If said 600K flat could be rented for LESS than £2K PCM over that period it makes sense NOT to buy. (That is a 4% Yield so quite realistic in London)

 

Conclusion: FINELY balanced option but swings in HTB favour as you have 5 years security of tenure, can decorate to your hearts content and dont have to deal with a Landlord.

 

Now for me, 600K gets you junk in London so I wouldnt bite, and my budget is higehr than this, AND I would like a proper house not a 2 bed showbox, but for a young twenty something this is a tempting option as requires relatively little cash down up front.

 

Agreed

I think it has fat tail risk-

 

1) what if the individual property (or rather it and other similar age htb properties) is virtually unsellable 5 years hence, as thousands of them 'mature' at the same time?

2) extending point 1, what if individually they fall more than 40% in value? (Not the market as a whole, just the marginal htb ones)

[Si1]

9 hours ago, mathschoc said:

And there it is, the biggest incentive for the dumb ass***** in government to keep property prices high. They don’t want to be punished for HTB.

They will come up with some sort of scheme, I can’t see how anything will help them now.

And herein lies the irony.

John major's govt was punished for the excesses of previous govts, whereas Tony Blair's govt was rewarded for the discipline of the previous one.

[mattyboy1973]

On 13/07/2018 at 19:29, Neverwhere said:

The interesting part is that the HTB Equity Loan appears to only be written off if a no/negative equity borrower sells.

If they decide to stay put then they still have to repay it.

Hence, Help To Fire Sale.

I don't believe this is true, as we have already had one example in the press of a buyer writing off their HTB loan by 90% after getting a valuation (cladding issues), without having sold the place. It seems that all you need to do is get an agreeable valuation and you can pull the trigger at any time to redeem the HTB portion of the loan, which obviously introduces some interesting incentives.

[Neverwhere]

9 hours ago, mattyboy1973 said:

I don't believe this is true, as we have already had one example in the press of a buyer writing off their HTB loan by 90% after getting a valuation (cladding issues), without having sold the place. It seems that all you need to do is get an agreeable valuation and you can pull the trigger at any time to redeem the HTB portion of the loan, which obviously introduces some interesting incentives.

I think my meaning wasn't clear, I was trying to make the distinction between the monetary value of the HTB Equity loan being written down - which is what happened in the recently publicised example which you mention, and what would happen in any case where a borrower wanted to redeem the HTB Equity loan without selling a property that had fallen in value - and all or part of the written down HTB Equity loan being completely written off.

For example, lets take a hypothetical borrower who purchased a £200k property with a £10k deposit, 20% (£40k) HTB Equity loan, and £150k mortgage. As it's a repayment mortgage lets say that by the time we come to consider them they have an outstanding balance of £140k. Now lets consider what this would mean for the HTB Equity loan if, in the intervening years, the value of this no-longer-new-build property had fallen by 30%.

The HTB Equity loan is for 20% of the current value of the property, so if our hypothetical borrower decided that they wanted to redeem the loan at this point in time, without selling the property, they would need to repay 20% of this new, lower valuation. This would mean that the HTB Equity loan had been written down to £28k, but that that £28k was going to be paid back.

However, if they decided that what they in fact wanted to do was sell the property, and the sale price they achieved was in line with the reduced valuation, then, as the proceeds of the sale after the repayment of the main mortgage would be less than the outstanding balance of the HTB Equity loan, according to the solicitor's pack they would only need to pay back the balance of the sale proceeds.

As the value of their property had fallen by 30% to £140k, and as they still had £140k outstanding on their main mortgage, the balance of the sale proceeds would be exactly zero. So the 20% HTB Equity loan which should have been written down to £28k gets completely written off and nothing is paid back at all.

Whether or not it makes sense to hold, and pay the written down amount, or sell, and write it off entirely, would likely depend on a number of other factors and costs, not least of which might be expectations of the future value of their property.

For a borrower who expected the reduced valuation to be a short term affair - for instance, due to an issue with the freeholder which they fully expected to be rectified in the fullness of time - then taking the opportunity to pay off their HTB Equity loan at a temporarily reduced valuation might be considered the equivalent of a significant windfall.

Alternatively, for a borrower who fully expected the valuation to fall further still - perhaps because the initial fall had been due mainly to the specific loss of the new build premium, but now property values generally were heading downwards in a more widespread house price crash - then the opportunity to walk away from the HTB Equity loan entirely, and avoid being trapped in negative equity, might be the more appealing option.

[mattyboy1973]

Wow - OK, thanks for that clarification. So it's actually even worse than I thought it was, and the borrower gets two cracks at reducing or writing off the balance of the HTB loan. The fact that they can pick and choose when to get a "favourable" valuation is bad enough - and no doubt this will be heavily exploited as firms already seem to be springing up that will facilitate this. The fact that they can actually write off the entire thing if prices fall far enough is going to generate some interesting incentives down the line. It really is a "put option" on houses with the rest of us mugs picking up the cheque. The reality of course is that most HTB new build purchases are under water from the moment the contract is signed.