Oh Dear! - Margin Calls On Btl Investments

[eek]

And wasn't the original post just one persons view?

Man you bears are so silly some times!!!

Um where does it say I'm a bear?

[Dingleberry]

BTL LL have gone bump because their properties were not worth the money that they were valued at. Look at the new development flats that were bought off plan

That's an indication of how some BTL landlords are faring. It's not an indication of how the entire housing market is faring.

Not yet, anyway.

[JustYield]

We discussed this 2 years ago here:

http://www.housepricecrash.co.uk/forum/ind...st&p=134859

These were my thoughts then:

I agree, as I have said before on the Dr B 5 questions thread from a couple of months back, the banks will treat OO differently to BTLers to start with.

However, when they see a BTL mini-empire about to go under water to the tune of several hundred thousand pounds, perhaps a cool million, they are likely to foreclose pretty quickly as they will anticipate the BTLers negative cashflow and will see he has no way out other than to sell. These are very highly leveraged assets.

In this scenario it will be a question of which lender blinks first.

I'd check the covenants carefully if I were a BTL investor.

Here is some wording extracted from an actual mortgage:

Security Margin

If at any time the market value is less than the amount we consider provides us with an acceptable security margin, or in our opinion the secured property materially decreases from its value ... or the secured property becomes less saleable ... we may:

...

c) require you to repay part or all of the total amount owing for all facilities on demand

In the Glossary, market value means:

...the most recent valuation by a valuer we [the bank] select OR

if there is no valuation report, the market value of the property as determined by us

Banks will already have their lists ready to go.

[Dingleberry]

Haven't we just discovered this is bull s**t? there is no such clause in the contract

Look at what the article actually said, please:

'Buy to let mortgages deals tend to contain little read covenants regarding the loan-to-value ratio of the mortgage.'

'Tend to', not 'always do'.

If I were in your shoes, I'd have a friendly solicitor look over the contract, just to check I wasn't missing anything. If it still looks good, then by all means clutch your contract to your chest and go 'oh thank f**k'.

[HousePriceLottery]

And wasn't the original post just one persons view?

Man you bears are so silly some times!!!

One persons view we are trying clarify as a statement of fact, i.e. that these covenants exist on most BTL mortgages.

Man you bear-name-callers are so condescending some times!!!

[HousePriceLottery]

From the old threads some research into why banks are likely to ask for top up payments:

http://www.landecon.cam.ac.uk/research/reu..._Sing_01.04.pdf

[Knut]

'Buy to let mortgages deals tend to contain little read covenants regarding the loan-to-value ratio of the mortgage.'

I would be interested to know how commonly this covenant is written into a contract as I have long wondered how a lender planned to protect their interest in what must have been regarded as a peaky market years ago. As to using the clause I would have little doubt that a bank would not hesitate to protect their interests be it for BTL or an owner occupier, not least because, as has been said, they have obligations to do so.

I am also struggling to understand why such a clause should not have been included in every contract since the the first ever house price deflation. Have the lenders solicitors been asleep?

Edited October 18, 2007 by Knut

[madasafrog]

We discussed this 2 years ago here:

And a lot earlier than that.

And here we are 20%+ later.

[JustYield]

And a lot earlier than that.

And here we are 20%+ later.

40% in my case.

[madasafrog]

This thread is a prime example of the distortion of the truth and self delusion exhibited by some of the bears on this forum

Taking one piece of news on something totally hypothetical and then declaring it as fact and meanwhile there are real life articles that are out there such as the fall in share prices of the major house builders:

Barratts down 5% on the day

Quinton Estate 5% on the day

Taylors 5% on the day

No one has been bothered to mention these. I have said before that part of me is bear but i would not want to be classed as part of the crazy gang

[madasafrog]

That "20%" may disappear a lot faster than it came.

Better exit fast, before it happens

Like 2 years ago? Or 3,4,5 years ago?

I have got 2 balls and neither of them are crystal. Maybe your different

[Dingleberry]

Taking one piece of news on something totally hypothetical and then declaring it as fact

'Buy to let mortgages deals tend to contain little read covenants regarding the loan-to-value ratio of the mortgage.'

That's not presented as a hypothesis. That's presented as a fact. If you're saying it's NOT a fact, then back it up.

You've mentioned that you've never seen the clause invoked so far, to which the obvious response is: of course you haven't, we're not in a falling market yet.

So I have to ask you again: what exactly are you trying to say here?

[doogie]

My view on this is that although banks may well have the right to make margin calls on BTL loans, to do so would create a huge amount of negative publicity for that bank, and their BTL mortgage business would probably never recover.

It would be akin to Northern Rock admitting it had just gone cap in hand to the BoE. It simply wouldn't happen unless the bank itself was in serious trouble.

Of course if a bank like this did find itself in trouble and had to sell its assets on to a Private Equity vulture, I would not be the slightest bit surprised if the new owner did whatever was necessary to maximise the short-term return on its investment.

[madasafrog]

'Buy to let mortgages deals tend to contain little read covenants regarding the loan-to-value ratio of the mortgage.'

That's not presented as a hypothesis. That's presented as a fact. If you're saying it's NOT a fact, then back it up.

You've mentioned that you've never seen the clause invoked so far, to which the obvious response is: of course you haven't, we're not in a falling market yet.

So I have to ask you again: what exactly are you trying to say here?

Bears have declared this clause will be implemented but cannot provide evidence of it ever happening. Therefore in my book, hypothetical and not fact.

I am saying that being a bear on here is too similar to being a religious fanatic. One little bit of a bearish article is warped and distorted to suite their own beliefs.

[Dingleberry]

My view on this is that although banks may well have the right to make margin calls on BTL loans, to do so would create a huge amount of negative publicity for that bank, and their BTL mortgage business would probably never recover.

Put yourself in the position of a saver rather than a borrower.

Which would you rather save with: a bank that acted so as to recoup funds in a falling market while it could, or a bank that sat back and watched the value of the securities on its loans go through the floor?

Remember that it's your money they're lending out to people.

[eek]

Bears have declared this clause will be implemented but cannot provide evidence of it ever happening. Therefore in my book, hypothetical and not fact.

I am saying that being a bear on here is too similar to being a religious fanatic. One little bit of a bearish article is warped and distorted to suite their own beliefs.

Two reasons why:-

1) in 1990 there were few landlords and those that did exist had commercial loans. In 2007 many landlords have a mortgage type that did not exist in the early 1990's

2) in 1990 banks lent their own money out as mortgages. today your mortgage comes from a bank lending out someone elses money. Its good whilst it lasted but it may not last.

[Sledgehead]

I have got 2 balls and neither of them are crystal.

Whilst I think you may be surprised by the way banks treat their new found friends (BTL crowd), That is a pretty funny quote. Is it famous?

[bazzzzzzz]

What a pointless thread. As if any lenders is going to undermine a customer who is paying their mortgage by resorting to this measure. Merryn is scraping the barrel here.

Agreed.

[doogie]

Put yourself in the position of a saver rather than a borrower.

Which would you rather save with: a bank that acted so as to recoup funds in a falling market while it could, or a bank that sat back and watched the value of the securities on its loans go through the floor?

Remember that it's your money they're lending out to people.

As a saver I'd probably think sh*t, this bank could be in trouble. I'm moving my money elsewhere!

[Dingleberry]

Bears have declared this clause will be implemented but cannot provide evidence of it ever happening.

Once again, that is because we haven't had a falling market!

The clause exists to protect the lender in the event of a market fall, which we haven't had while BTL mortgages have been fully underway. So of COURSE you haven't seen it happening. I refer you to my previous comment about seatbelts.

Now, if you're saying that it would NOT be invoked in the event of a falling market... well, in that case, one has to ask you why you think the lenders are putting these clauses in in the first place?

[Mr Nice]

the idea that banks or other lenders would not make margin calls is divorced from reality.

If you don't have enough cash to cover the margin call, AND you are getting less rent than the cost of the loan, it is likely that you are going to be busted sooner or later.

it is definately in the banks business to get their money sooner rather than later.

and as has been said before, many of the securities that these loans are put into need to be refinanced periodically, as we've seen from the credit crunch already, standards have gone up, people aren't buying the same crap as they did before.

the only way I can see it not being instituted, is as in the case of NR when the Government takes over the securities as collateral, they might not push for re-valuation, and are much more likely to risk eating it than your average bank.

Edited October 18, 2007 by Mr Nice

[Bloo Loo]

I would like to see an example of this clause in a real contract before I make judgement.

I do know that my mortgage terms and conditions were a 20 page booklet in very small print.

It would have taken hours to go through it to find a vaguely worded covenant.

[bazzzzzzz]

If the lender allows the LTV to rise above the original agreed level, they are effectively shouldering more risk. Not more risk of default, but a risk of higher losses in the event of default.

Why should a lender increase risk of default by insisting the BTLer pay money to readjust the LTV? Doesn't make sense. Not while he's paying the mortgage every month.

Is there any evidence these clauses are enforced in practice?

Edited October 18, 2007 by Baz63

[Woody Finch]

Once again, that is because we haven't had a falling market!

The clause exists to protect the lender in the event of a market fall, which we haven't had while BTL mortgages have been fully underway. So of COURSE you haven't seen it happening. I refer you to my previous comment about seatbelts.

Now, if you're saying that it would NOT be invoked in the event of a falling market... well, in that case, one has to ask you why you think the lenders are putting these clauses in in the first place?

I agree. All the banks care about is getting their money back and will do what is necessary to achieve that. LTV ratios become very important in a falling market because they are the safety margin for the bank. They will ask for more equity, or foreclose quickly in the case of BTL investors and more slowly and gently in the case of FTBs.

In a falling housing market no one will be saying "Poor BTL investor has lost his flat".

[Woody Finch]

Why should a lender increase risk of default by insisting the BTLer pay money to readjust the LTV? Doesn't make sense. Not while he's paying the mortgage every month.

Is there any evidence these clauses are enforced in practice?

Because the fall in the value of the property threatens the prospect that the bank will ever get their money back (i.e. risk of defaulting over life-time of loan has just risen dramatically).