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88Crash

They Kept This One Quiet

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“The Council of Mortgage Lenders does not compile figures for sub prime lending but estimates from Mortgages Plc, owned by Merrill Lynch, are that sub prime mortgage lending was around £25bn-£30bn last year – around 10 per cent of the total mortgage market and larger than the CML’s estimate for the entire buy-to-let sector.”

http://www.ft.com/cms/s/e8f9d3b2-060e-11db...00779e2340.html

Ever wondered how the market continues to rise, apart from the obvious, “house prices always rise”, hence the market feeds itself, until there is a trigger or more likely it collapses under its own weight..

Add to that the official BTL’s and probably a far greater number of unofficial BTL’s, throw in some highly geared residential mortgages, being subsidised by credit cards, add some new builds that are being slipped into the market that are being unofficially discounted, its not surprising that the UK property market continues to defy gravity!

It goes beyond my knowledge to understand exactly where this money is coming from, but it sounds like its via hedge funds, carry trade etc,

Well here is another 10% of the market that is being bought with what is in effect ‘dodgy mortgages’

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“The Council of Mortgage Lenders does not compile figures for sub prime lending but estimates from Mortgages Plc, owned by Merrill Lynch, are that sub prime mortgage lending was around £25bn-£30bn last year – around 10 per cent of the total mortgage market and larger than the CML’s estimate for the entire buy-to-let sector.”

http://www.ft.com/cms/s/e8f9d3b2-060e-11db...00779e2340.html

Ever wondered how the market continues to rise, apart from the obvious, “house prices always rise”, hence the market feeds itself, until there is a trigger or more likely it collapses under its own weight..

Add to that the official BTL’s and probably a far greater number of unofficial BTL’s, throw in some highly geared residential mortgages, being subsidised by credit cards, add some new builds that are being slipped into the market that are being unofficially discounted, its not surprising that the UK property market continues to defy gravity!

It goes beyond my knowledge to understand exactly where this money is coming from, but it sounds like its via hedge funds, carry trade etc,

Well here is another 10% of the market that is being bought with what is in effect ‘dodgy mortgages’

Good find, but this stuff has been going on for years now, i am starting to regain confidence in myself again that i know a lot more than some of these big boys. :)

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This is a very interesting find. 10% is a big slice of the market. If things do turn really nasty, then this lot will be amongst the first to fall.

Also, the investment banks would also be in a position to pull their support to this particular market much more quickly than the high street banks, because they have such a wide range of investment vehicles elsewhere. The pulling of £bns from the market would be have the knock on effect of speeding the deflation when it eventually does come.

I am a bit surprised that they are so late into the market though :huh: .

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I am a bit surprised that they are so late into the market though :huh: .

I suspect that its a lot more than 10% (The CML don't keep official figures) and its probably been going on for several years in a more fragmented way

Remember that BBC undercover documentary about dodgy mortgages a couple of years back?

Although some of the big lenders were ‘implicated’, ultimately it was the naughty brokers that were at fault, hence the big guys deny all knowledge.

I’m sure a lot of this money arrives in the UK via some complicated routes and when defaults occur (and they will) its already been factored in and a few subsidiary companies will go to the wall.

In the meantime massive profits are being generated, along with massive commissions and bonuses, so in the short term “do they care”?

Edited by 88Crash

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If you think that is bad, how about Southern California (the world's second biggest bubble next to the UK!) where over 80% of all mortgages taken out in the last two years were "creative financing" with IO, Balloon payments, and subprime rates. Normally, the majority of loans in the US are with "conventional financing" where the rate is fixed for 15-30 years. IN order to qualify for conventional financing multiples (3 X proven income is the norm) are looked at together with credit history.

It is the level of dodgy loans that will make things different this time. A "new paradigm" featuring an implosion of debt obligations due to lack of fundamental supports such as income levels, stability of loans in relation to rates, stability of mortgagors in relation to their credit history and so forth. A true "Miracle Economy."

http://realtytimes.com/rtapages/20051227_california.htm

In his November, 2005 edition, Campbell writes, "Creative financing can be very dangerous when the price of the asset loses significance. People start believing that it doesn't matter whether a home sells for $200,000 or $400,000 because the monthly payment is the same. Sorry, but when mortgage loans are based on fictional values as opposed to true values that are supported by economic fundamentals, financial bubbles can develop that eventually implodes."
"Pushed to extreme levels of overvaluation by greed and easy money," writes Campbell, the California real estate market is now a bubble. Housing prices have risen to a price/earnings ratio that is significantly out of balance with sustainable economic fundamentals. When a bubble bursts, history shows that , at a minimum, prices will retreat back to levels that are consistent with long-term norms. Sometimes, however, over-inflated asset prices fall to P/E ratios that are below the long-term norms, when this happens, the stage is set for the next great buying opportunity." P/E's were at their most favorable in 1985 (4.1) and 1996 (4.1). If incomes rise 4 percent annually, creating an average income of $70,500 in 2009, home prices should fall to $303,150.
That would represent a
44 percent decline from today's median
home price of $544,000.
Edited by Realistbear

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“The Council of Mortgage Lenders does not compile figures for sub prime lending but estimates from Mortgages Plc, owned by Merrill Lynch, are that sub prime mortgage lending was around £25bn-£30bn last year – around 10 per cent of the total mortgage market and larger than the CML’s estimate for the entire buy-to-let sector.”

...

Well here is another 10% of the market that is being bought with what is in effect ‘dodgy mortgages’

Can someone define "sub-prime" or "dodgy" to me please?

In the US I believe it means hybrid fixed->adjustable rate from sub-prime lenders. Is it the same definition here?

Thanks in advance

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Can someone define "sub-prime" or "dodgy" to me please?

In the US I believe it means hybrid fixed->adjustable rate from sub-prime lenders. Is it the same definition here?

Thanks in advance

In the US the ARM stuff is considered sub-prime I believe, over here it is the norm. Even when the likes of the CML shout from the rooftops about people being sensible and safe by using "fixed" rate there are never any breakdowns - I bet most of it is two-year fixes - some cushiopn that is ove the lifetime of the mortgage!

Sub-prime over here really is sub-prime - previous defaults, existing debts, no deposit, high income ratio stuff - scraping the bottom of the lending barrel.

Edited by OnlyMe

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In the US the ARM stuff is considered sub-prime I believe, over here it is the norm. Even when the likes of the CML shout from the rooftops about people being sensible and safe by using "fixed" rate there are never any breakdowns - I bet most of it is two-year fixes - some cushiopn that is ove the lifetime of the mortgage!

Sub-prime over here really is sub-prime - previous defaults, existing debts, no deposit, high income ratio stuff - scraping the bottom of the lending barrel.

Some of us will recall a thread a few weeks back where Nationwide among others were going to lower their lendig criterea to allow even those with CCJs to borrow. Signs of a market in trouble. With lenders no new loans means no more commissions. No more commissions means no job and the house on the market. Like a shark, the lenders must keep moving forward or die. IF they can only lend to subprime borrowers they will do it--or die.

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Some of us will recall a thread a few weeks back where Nationwide among others were going to lower their lendig criterea to allow even those with CCJs to borrow. Signs of a market in trouble. With lenders no new loans means no more commissions. No more commissions means no job and the house on the market. Like a shark, the lenders must keep moving forward or die. IF they can only lend to subprime borrowers they will do it--or die.

They will die anyway. All they are doing is putting of the day of reconning, and probably significantly increasing the force of the impending implossion!

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Can someone define "sub-prime" or "dodgy" to me please?

In the US I believe it means hybrid fixed->adjustable rate from sub-prime lenders. Is it the same definition here?

Thanks in advance

My definition of subprime (in the context of this post) would be lending money to people that can’t really afford to pay it back over the longer term i.e. they have to refinance/MEW/subsidise the repayments from somewhere other than their salary.

This is often justified because “property always goes up”

The problem with this is, what happens when property doesn’t go up?

Even worse, what the hell happens when property goes down?

My definition of ‘dodgy’ is anything less than 100% correct mortgage application

Examples = Salary 25K, but on application you put down 60K, Application says it’s a private dwelling, but its actually a BTL

PS IMO if somebody exaggerates their salary for the sole purpose of buying their own home to live in, I don’t think they have done anything illegal and going by the unwillingness of the police to get involved in such matters, the cops don’t either!

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PS IMO if somebody exaggerates their salary for the sole purpose of buying their own home to live in, I don’t think they have done anything illegal and going by the unwillingness of the police to get involved in such matters, the cops don’t either!

But, strictly speaking, isn't it fraud?

Peter.

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In the US the ARM stuff is considered sub-prime I believe, over here it is the norm. Even when the likes of the CML shout from the rooftops about people being sensible and safe by using "fixed" rate there are never any breakdowns - I bet most of it is two-year fixes - some cushiopn that is ove the lifetime of the mortgage!

Sub-prime over here really is sub-prime - previous defaults, existing debts, no deposit, high income ratio stuff - scraping the bottom of the lending barrel.

Thanks OM & 88, I suppose the question we need answering is what proportion of total lending the 2/3/5 year fixes make up, and an estimate for how many will reset to higher rates in 06,07,08 etc.

In the US there's some interesting figures:

Yesterday in Foreclosures Rise I was trying to figure out exactly what dollar amount of mortgages would have their rates reset and when. I had two numbers: $1 trillion and $2.5 trillion. Both are correct it turns out. Jack McCabe was kind enough to respond to my question with this breakdown.

2006 - $500 billion adjusts first time

2007 - $1 trillion adjusts first time

2008 - $1 trillion adjusts first time

The article 'Foreclosures Rise' he is referring to is here:

http://globaleconomicanalysis.blogspot.com...is_archive.html

Fewer than 10 percent of the conventional conforming loans will reset in 2006-2007, but nearly two-thirds of sub-prime loans will. That is because a large portion of the sub-prime loans are two-year adjustables, says Berson, the Fannie Mae chief economist.

If the picture in the UK is as severe as this (see above article for details), we may be in for a rough couple of years.

tc

Edited by The Colour

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But, strictly speaking, isn't it fraud?

Peter.

You are correct - it is fraud and I think the maximum penalty is something like 7 years in prison

There are no official figures on how many mortgages would be fradulent under this definition, but at a minimum, it must number hundreds of thousands (probably more like a few million)

We don't have enough prison space for murderers, so I don't think there will be too many convictions for mortgage fraud any time soon

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“The Council of Mortgage Lenders does not compile figures for sub prime lending but estimates from Mortgages Plc, owned by Merrill Lynch, are that sub prime mortgage lending was around £25bn-£30bn last year – around 10 per cent of the total mortgage market and larger than the CML’s estimate for the entire buy-to-let sector.”

I'm confused by those figures. The British Bankers Association has outstanding loans secured on dwellings at 517 billion which would put sub prime at only 5%ish.

Edited by Sisyphus

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PS IMO if somebody exaggerates their salary for the sole purpose of buying their own home to live in, I don’t think they have done anything illegal and going by the unwillingness of the police to get involved in such matters, the cops don’t either!

I guess technically it's fraud, but that's not the important point.

The important point is that the borrower does not have a leg to stand on if they get into trouble. The presence of these fraudulent borrowers makes the market more volatile. After a couple of months of defaulting, the lender is going check out their income, find out about the BTL and repossess them much more quickly than a traditional income verified, owner occupier borrower.

frugalista

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I guess technically it's fraud, but that's not the important point.

The important point is that the borrower does not have a leg to stand on if they get into trouble. The presence of these fraudulent borrowers makes the market more volatile. After a couple of months of defaulting, the lender is going check out their income, find out about the BTL and repossess them much more quickly than a traditional income verified, owner occupier borrower.

frugalista

Good point and that would make it "different from last time"

During the last crash IMO government leant quite heavily on the lenders not to repo too quickly and the courts not to grant repo orders unless there was no alternative

Back then the lenders were predomiantely UK building societies

Now the lenders are international banks and if they can easily prove fraud - repo is guarenteed - quick sale - cut their losses

They won't make the mistake of delaying like last time!

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Good point and that would make it "different from last time"

During the last crash IMO government leant quite heavily on the lenders not to repo too quickly and the courts not to grant repo orders unless there was no alternative

Back then the lenders were predomiantely UK building societies

Now the lenders are international banks and if they can easily prove fraud - repo is guarenteed - quick sale - cut their losses

They won't make the mistake of delaying like last time!

Exactamundo. The lenders this time round (especially those involved in the "sub-prime" market) are not your friendly mutual household names, (Britannia, Nationwide etc.) who have a stake in keeping the government and public relations on side.

frugalista

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  • 302 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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