Oh Dear! - Margin Calls On Btl Investments

[Dingleberry]

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.

Let's not be so naïve as to think a lender would blithely lend a large sum of money against a security that could lose, say, half its value, without a clause in there to cover the eventuality. That's what this clause is.

The whole point of security is that it's secure for the lender. You appear to expect a lender to effectively write off tens of thousands, just to make the customer's life easier. In a falling market, the lender is forced to estimate not only the borrower's CURRENT ability to pay back his borrowings, but also his FUTURE ability. Therefore, given the choice between getting something back today and nothing tomorrow, the lenders will opt for something today, especially given the anxiety created by the US subprime fallout.

[huw]

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. If we've learned nothing else from the subprime crisis and Northern Rock debacle, it's that efficient pricing of risk is essential to keeping businesses functioning.

I agree, we have learned that

[Orbital]

I appeared on BBC Breakfast last week with a buy to let investor who was convinced he was very rich

interesting, I guess this is that smug guy we saw in a suit the other week, and this is the girls response. Not suprised by her need to write this as he did rather piss over her. The prob I had was that she came across as wanting to put him down, she kinda liked that this guy was in trouble and hated his refusal to accept it. I just found it a little uncomfortablle. She would have been better to have been more objective and stuck to facts. This response shows that it was personal and is clearly her having the "last word". Bit weird.

I hope we find out what happens to the guy one day. Now there is a future TV program waiting to be made!

edit: oh I also dont see why its in the banks interest to force LLs to sell at a loss. Surely that will force people into bankruptcy and who loses? The bank.

Edited October 18, 2007 by Orbital

[Fishy]

Won't it all come out in the wash anyways?

These BTLs with their newbuild 2 bed luxury appartments that have lost 20-40% in the last few years, what will they do when they want to re-negotiate a new fixed rate?

Either stump up the capital loss to keep the same LTV, move onto the lenders SVR or sell up.

Which do you think will happen?

(And don't believe for a minute that the ~30% increase between the SVR and their old fixed could be passed on to their tenants!)

If the banks do enforce these terms, it will just bring it forward a bit sooner, but it's gonna happen anyways...

[Uriah Heap]

Well I have no expertise or experience in this area, but I am not going to let that stop me from making a comment.

If I were a lender I would really not want to be the first one to put this into practise. The publicity would be worse than the risk of losing some money at some point in the future.

However, if others started I would certainly not want to be the last. If margin calls on BTL are on the agenda I wouldn't want to be the patsy that leaves my picnic on the grass when the rain starts.

I think this is a landmine under the market. If someone treads on it, it will go off with a bang. But the chances are nobody will put their foot on it.

[Bloo Loo]

interesting, I guess this is that smug guy we saw in a suit the other week, and this is the girls response. Not suprised by her need to write this as he did rather piss over her. The prob I had was that she came across as wanting to put him down, she kinda liked that this guy was in trouble and hated his refusal to accept it. I just found it a little uncomfortablle. She would have been better to have been more objective and stuck to facts. This response shows that it was personal and is clearly her having the "last word". Bit weird.

I hope we find out what happens to the guy one day. Now there is a future TV program waiting to be made!

edit: oh I also dont see why its in the banks interest to force LLs to sell at a loss. Surely that will force people into bankruptcy and who loses? The bank.

Banks do very strange things when they are losing profits, they wil try to secure any potential bad debts, then call them down in any way they can.

This happened in the last recession, when many small business had overdraft facilities, first they would try and call them down, then they would offer to keep the facility if the borrower made the overdraft secured on an asset, like their home.

If they didnt they would reduce the overdraft by the amount of any cheques that came in, effectively protecting themselves but driving the business under.

Dont expect any Heart and Soul from Banks in trouble, expect only shock and Awe

[Smell the Fear]

Well I have no expertise or experience in this area, but I am not going to let that stop me from making a comment.

If I were a lender I would really not want to be the first one to put this into practise. The publicity would be worse than the risk of losing some money at some point in the future.

However, if others started I would certainly not want to be the last. If margin calls on BTL are on the agenda I wouldn't want to be the patsy that leaves my picnic on the grass when the rain starts.

I think this is a landmine under the market. If someone treads on it, it will go off with a bang. But the chances are nobody will put their foot on it.

They wouldn't do it, it would precipitate a downward spiral in the housing market and losses would become a self-fulfilling prophesy. The lenders won't care as long as the interest payments are being made. if they aren't being made they will repossess.

[mfp123]

this is a very interesting thread.

if people are required to meet margin calls this will hit people significantly as although they maybe able to budget for higher mortgage repayments, no-one will have the budget to pay an instant £10,000, £20,000 margin call.

the issue with buy to let is that they are similar to commercial loans and as such they are not regulated by the fsa. if margin calls are required then this is a very big issue that not many people have considered before. i certainly havent.

i suspect the problem would only crop up when mortgages need to be renegotiated at the end of their current term.

if prices fall you can argue that many landlords just wouldnt sell their properties and would ride out the storm. under this scenario they couldnt do that.

this is a very worthy topic and much more significant than 90% of the other nonsense that sometimes gets put around.

[Guest Popalot]

Without any prior evidence of this, then this article is groundless.

The only time I can see the LTV being an issue in a falling market is when they come to remortgage at the end of a fixed rate period. If prices fall they may not be able to attain the LTV of 85% required and will therefore be hit by the increased costs of servicing the mortgage on the higher Standard Variable rate.

Merryn Somerset Webb, who wrote this article was obviously put off by this spiv so is clutching at straws to shoot him down.

If anyone has some credible example of what she is claiming on a BTL, then please come forward. If it is true, then it could have dire consequences the BTL industry in a falling housing market. If, as I suspect, it is totally groundless, then its just another piece of bear food thats full of additives.

Dear madasaBTLlandlord....... Do you really think that Money Week's editor would put out a factually incorrect article on this volatile topic justforthe hellofit....sorry mate....you bulls are clutching at straws these days it is almost painful to witness the shrinking of your arguments....almost but not really.

[Uriah Heap]

They wouldn't do it, it would precipitate a downward spiral in the housing market and losses would become a self-fulfilling prophesy. The lenders won't care as long as the interest payments are being made. if they aren't being made they will repossess.

Put in a 'probably' between the first two words and I'd agree with you. I am sure there will be strenuous efforts to avoid a house price crash, which of course hasn't actually happened yet.

But a year ago this debate would have been entirely academic as everyone's portfolios were increasing in value. It does show that the whole edifice is shaky now - there may not be a single BTL in negative equity in the country for all I know. But we all now accept that it is possible.

[pimperne1]

Dear madasaBTLlandlord....... Do you really think that Money Week's editor would put out a factually incorrect article on this volatile topic justforthe hellofit....sorry mate....you bulls are clutching at straws these days it is almost painful to witness the shrinking of your arguments....almost but not really.

I think you are joking but just in case. We are talking Merryn Somerset Webb here for whom the Vested Interest description might have been invented. Yes she will probably reap great rewards from her being the first to predict an HPC (back in 2003), her articles in the Times (and Standard?) will seem more authentic and she will bask in the reflected glory of her accurate prediction (be in 2007/08/09).

[loafer]

Perhaps I can provide some help.

In the commercial loan market, LTV covenants are very commonplace, indeed it was the exclusion of clauses like this which was described as cov-lite and led to a massive overhang in Leveraged finance when the credit crunch happened.

Banks do invoke them in a downturn, but obviously there is no need and no point in a rising market. They are there to protect the bank and it's stakeholders (shareholders, depositors). Normally, it enables a bank to renegotiate a loan - either higher interest rate to reflect higher risk, or to require a borrower to put in more cash.

In the case of RMBS securitised assets, there will be limited re-purchase requirement in some cases, but generally the implication would be that a rating agency would downgrade in expectation of, or due to evidence of, breach of the underlying loan clauses, including LTV.

This would reduce the value of the security (AAA note for example). The job of the servicer (which may well be the originating bank - think NR & Granite) is to manage the portfolio to protect the noteholders, and in the case of a face off between a potential downgrade or asking borrowers for cash under an LTV clause, they will do the latter.

On the other hand, they won't want to exercise security as excessive defaults will also trigger downgrade, so they will probably give the borrower some time to sort it out, say by selling an asset, and reducing leverage on the remaining assets with the released equity.

Loafer

[yellerkat]

Can you actually see a BTL mortgage company pursuing this course of action in anything other than those with serious account problems ? It would likely trigger more problems for them than it would solve. Far better to have the owner paying something each month than to force them into difficulties.

Buckers

That wasn't the banks' behaviour in the last downturn and I doubt it'll change now. Sauve qui peut - first into the lifeboats wins.

[R K]

I agree this is a very interesting thread.

There is a difficulty here in that there is no past event to compare to.

During the previous crash most of the residential lending was via mutual building societies not banks. Bank lending for residential mortgages has traditionally been a fairly small share of the market. The rationale for a building society to repossess would have been default for a number of months and little prospect of improving circumstances.

Most of the BTL lending is not done by mutual building societies now. It is done by PLC banks (or subsidiaries). They have entirely different business models and capital requirements. BTL lending is directly comparable with any other business lending where the security valuation is much more important. Owner occupiers would probably not be affected by rising LTV ratios provided they keep up repayments. BTLers however should expect to be treated no differently to any other business customer. If the value of their security (in this case market valuation on their property) falls it would be entirely rational for the bank to request either additional security, perhaps a charge against the main home, additional guarantees, or cash margin calls (from asset sales if necessary).

The assumption that a commercial bank is going to sit back whilst the value of its security falls, transferring risk from the business BTLer to the bank, until such time that their customer is potentially insolvent, is nonsense. Banks don't just take security, stick it in a drawer and forget about it for 25 years until the loan is repaid. They periodically review all security and if necessary will require it to be revalued.

In this example, a 30% downwards revaluation, and this guy goes from having £2.5m to being bankrupt. If it were me I'd have settled for the £2.5m. I suspect he will go bankrupt.

Edited October 18, 2007 by Red Kharma

[Dingleberry]

That wasn't the banks' behaviour in the last downturn and I doubt it'll change now. Sauve qui peut - first into the lifeboats wins.

Exactly. Banks aren't altruists. They won't put themselves into 'difficulties' just to spare the customer 'difficulties', particularly when the customer has made a business investment, which is what BTL is.

Edited October 18, 2007 by Dingleberry

[frugalista]

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.

But what you're saying is that a business will refrain from taking a step which reduces its own risk and which it has the legal right to take.

BTW the bears predicted this on hpc.co.uk years ago.

frug.

[crash2006]

edit: oh I also dont see why its in the banks interest to force LLs to sell at a loss. Surely that will force people into bankruptcy and who loses? The bank.

Actually it is, the longer they wait the worse it becomes the less the bank gets back, you have too understand the bank never loses, as its deducted from tax etc...

Going bankrupt only hurts yourself not a large bank, they have your assets and they can approach the losses in various ways. If you dont go bankrupt then you'll end up paying the difference of what they sold it for and what they lend you. If you go bankrupt some banks will keep the property and lease it out to a HA untill the time the property markets rise again then they sell it.

[South Lorne]

They havent need to do this since the market cycle turned UP in 1994.

But if it comes down to the lender versus the borrower in a falling market ... guess what?

..as a product BTL was introduced to the UK in 1995 for the first time and is not regulated by the FSA....probably because they have enough on their hands....

[ChrisM]

Exactly. Banks aren't altruists. They won't put themselves into 'difficulties' just to spare the customer 'difficulties', particularly when the customer has made a business investment, which is what BTL is.

Adding a 'me too'..

For anyone thinks that the banks wouldn't turn nasty, ask anyone whose business got killed at the end of the 80s/early 90s when the banks started calling in the loans, to how nasty the banks can be.

[flapjack]

This 'margin call' is the cost of leverage. If you use borrowed money to fund an investment you must expect to pay the bank for thier risk and they will ensure that you assume most of the risk. Try getting a bank to lend 100% on a business purchase - the most you will be offered will be 60-70% in my experience. BTL is a commercial venture and as with all business ventures there are signifcant risks involved.

All those adverts saying 'Invest in propery, high returns and no risk' should be bannned by the advertising standards authority. You can't say that sort of thing regarding shares - so why sould it be allowedfor property investments? All business ventures involve some risk.

The scary thing about this factor is that it won't just be individuals who face this but the whole BTL industry. Ok - well not the well established ones they will have high amounts of equity in their portfolios but anybody going into BTL in the last 3/4/5 years will all face the same risk if prices turn down. Snowball going downhill!!

[loafer]

But what you're saying is that a business will refrain from taking a step which reduces its own risk and which it has the legal right to take.

BTW the bears predicted this on hpc.co.uk years ago.

frug.

It's not so much a right as an obligation when the debt is securitised. The Servicer has to take any and all actions within it's powers to mitigate potential losses.

[R K]

It's not so much a right as an obligation when the debt is securitised. The Servicer has to take any and all actions within it's powers to mitigate potential losses.

Thank you for your excellent posts clarifying this Loafer.

[piece of paper]

Perhaps I can provide some help.

In the commercial loan market, LTV covenants are very commonplace, indeed it was the exclusion of clauses like this which was described as cov-lite and led to a massive overhang in Leveraged finance when the credit crunch happened.

Banks do invoke them in a downturn, but obviously there is no need and no point in a rising market. They are there to protect the bank and it's stakeholders (shareholders, depositors). Normally, it enables a bank to renegotiate a loan - either higher interest rate to reflect higher risk, or to require a borrower to put in more cash.

In the case of RMBS securitised assets, there will be limited re-purchase requirement in some cases, but generally the implication would be that a rating agency would downgrade in expectation of, or due to evidence of, breach of the underlying loan clauses, including LTV.

This would reduce the value of the security (AAA note for example). The job of the servicer (which may well be the originating bank - think NR & Granite) is to manage the portfolio to protect the noteholders, and in the case of a face off between a potential downgrade or asking borrowers for cash under an LTV clause, they will do the latter.

On the other hand, they won't want to exercise security as excessive defaults will also trigger downgrade, so they will probably give the borrower some time to sort it out, say by selling an asset, and reducing leverage on the remaining assets with the released equity.

Loafer

Quoted in its entirety because it explains so much. However, isn't the highlighted bit what the whole CDO fuss was about? A thin slice of turd was put into some packs of sliced salami so that the salami kept its AAA rating, there being insufficient turd to downgrade it to AAB. This was complicated further by turd not being put in every pack so after it left the wholesaler, nobody knew where it had gone to.

p-o-p

[eek]

Can you actually see a BTL mortgage company pursuing this course of action in anything other than those with serious account problems ?

Yes. Imagine that the loan is offloaded elsewhere for the three years of the initial fixed period and then needs to be refinanced in the same way that £13bn of Northern Rock's loans have had to be over the past six weeks. Now imagine that everyone is edgy and doesn't want to be the one holding a poorly managed loan base.

The bank will either have to find a way of financing a loan portfolio of unknown quality (which is going to mean paying a large additional risk premium) or investigating the quality of the loan portfolio and refinancing it based on the quality of it.

If they investigate they will discover problem properties, if they don't the good properties that can be refinanced will find better deals and disappear leaving only the bad ones behind.

Initially the choice is between upsetting everyone and keeping the good quality items or ignoring it and losing the good quality items. Trouble is once one person starts filtering out poor quality loans everyone else is going to have no choice but to join in.

I'm glad my pension is under my own control as this crap is probably absolutely everywhere.

[HousePriceLottery]

What about the fact that they have normally wrapped this up this debt and sold it off to our pension funds with a AAA rating?

The only point that LTV will become an issue is at a time of remortgaging or if the borrower is running into trouble.

This bear food is tasteless

If you have a loan secured against your business, and your business halves in value, the banks will care. They won't wait until you try to secure other debt, they will move to protect themselves. These aren't all people holding a mortgage against one property, some of them are very highly leveraged. That is a big risk.

Well if you take comfort from believing that then who am I to argue.

I don't think I set out a belief, I merely pointed out that Merryn is factually correct, those loans do state plainly that the bank has a right to ask you to make good your LTV commitment.

You are the one with a belief, the ill founded belief that banks would never invoke that clause.

For the record I think it is significantly more likely banks would first attempt to increase the interest rate on the affected businesses before asking for paying down of the debt to make the LTV's good, it is true there is no reason for them to sink you completely.

But I don't think it is as unlikely as many obviously think that they may ask you to pay down your debt, in fact I think it is a distinct possibility. Particularly where a borrower has multiple properties they may force the sale of one to balance the LTV across the rest of the portfolio. This is standard business practice for normal businesses.

Remember BTL is a business, and BTL loans are business loans. You are swimming with the sharks when you go into BTL, as you are running a business whether you realise it or not.

Edited October 18, 2007 by HousePriceLottery