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Good Article/release From The States On Mortgages

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Banks Have No Exposure to Mortgages? Think Again:

Every time the subject of banks making risky home loans to bad credit risks -- no money down, no questions asked -- the usual retort is that banks sell the mortgages. They aren't at risk. It doesn't matter if the loan stops performing because they don't own it.

That's not exactly true. According to the Federal Reserve's Flow of Funds report for the fourth quarter of 2005, mortgages accounted for 32 percent of commercial banks' financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent.

What happens to housing matters to the economy -- and not just because of the effect that reduced equity extraction would have on consumer spending if home prices were to stabilize or decline. It matters because mortgages are the big kahuna on banks' balance sheets. If enough of these loans go bad, as they did in the late 1980s and early 1990s, it could impair the banking system's ability to extend credit, with all that implies for the economy

http://firstrung.co.uk/articles.asp?pageid...1765&cat=47-0-0

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Banks Have No Exposure to Mortgages? Think Again:

Every time the subject of banks making risky home loans to bad credit risks -- no money down, no questions asked -- the usual retort is that banks sell the mortgages. They aren't at risk. It doesn't matter if the loan stops performing because they don't own it.

That's not exactly true. According to the Federal Reserve's Flow of Funds report for the fourth quarter of 2005, mortgages accounted for 32 percent of commercial banks' financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent.

What happens to housing matters to the economy -- and not just because of the effect that reduced equity extraction would have on consumer spending if home prices were to stabilize or decline. It matters because mortgages are the big kahuna on banks' balance sheets. If enough of these loans go bad, as they did in the late 1980s and early 1990s, it could impair the banking system's ability to extend credit, with all that implies for the economy

http://firstrung.co.uk/articles.asp?pageid...1765&cat=47-0-0

Yes

The truth is the banks have a % of exposure. They already know that property prices will take a tumble but it is still viable for them to take on these risks, because: the margins on their cost and sale money prices are high, and because they have these risks off set against an asset (housing) at a % "risk"

Things could change very quickly, the most importantant factor being the banks ability to buy money cheap effecting their margin, the other factors of falling house prices and defaults would also be quite important.

At the end of the day (or night) banks are the same as any other business, they are out to make money. Because they are usually large organisations they know the profitability but equally they will be vunerable and slow to manover in a downturn. Some might get burnt quite badly.

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So lets say that a bank lends you £100,000 at 5%. They got that money from China at 1.5%. Because their mark-up was 3.5% they can offord for the house to drop in value and not get their £100K back?

Or am I tired?

TB

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So lets say that a bank lends you £100,000 at 5%. They got that money from China at 1.5%. Because their mark-up was 3.5% they can offord for the house to drop in value and not get their £100K back?

Or am I tired?

TB

Mortgages are at a 'low' rate since they are secured loans - supposedly the bank is at low risk since if payment is not forthcoming they can sieze the asset. This relies on the asset being fairly valued.

Imagine there is a HPC and the value of the property as defined by the market falls to 80k. If the owner continues to make mortgage payments then fine, but should they fall into arrears and the house is repossesed then the house most likely cannot cover the outstanding balance (unless they paid a substantial % down, not likely these days).

If the bank is making 3.5% profit on all its mortgages, what percentage of loans in a 20% downturn have to default before they start to make a loss? I think it's about 14% (massive percentage, not going to happen), but even if only 2% default it's still around a 15% drop in profits - and 15% drops in profit don't go down too well in the market.

This assumes they haven't sold off the mortgage to someone else, of course.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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