Oh Dear! - Margin Calls On Btl Investments

[bazzzzzzz]

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

If that's the case where's your evidence these calls have been made in the past?

[madasafrog]

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 stated earlier it may be implemented if a LL is defaulting on mortgage. It is fanciful to think that Bradford and bingley is going to ask all their BTL to have another valuation done on all their properties even though they have not missed a payment. But if it makes the bears happy to think so, carry on. Meanwhile back on planet earth......

[bazzzzzzz]

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

What about previous house busts? What about other countries' experiences?

[Dingleberry]

What about previous house busts?

Already covered. BTL, which is what we're talking about, wasn't endemic at the time of the last crash; it is now.

What about other countries' experiences?

Fair question! Merryn's clearly talking about the UK. Do we have any data regarding the scope of BTL in other countries during a crash?

[R K]

No such clause in YOUR contract. It may very well be a clause in many contracts. Just because your bank was getting NRK sloppy, doesn't mean all of them did.

I find it impossible to believe there is no clause in a BTL contract covering the value of the security given, the revaluation of the security by the lender or the ability of the lender to request on demand repayment. Any of those clauses would lead to the same effect. I would not believe in the absence of such a clause without seeing an actual BTL contract.

[pimperne1]

Well trying to be a bit more understanding here would this be more accurate:

Some BtL contracts (although we do not know how many) have the clause permitting a review of LTV in them.

Some BtL "investor's" properties (although we do not know how many) may drop to a level where lenders might consider their loan vulnerable (presumably before it reaches the loan amount).

Some Lenders (although we do not know how many) might insist on their BtL "investors" paying an amount in to their bank/bs.

Some BtL "investors" (although we do not know how many) might not be able to do this.

Some BtL "investors" (although we do not know how many) might need to sell their properties for the value of the mortgage and thereby make a loss (effectively of their deposit).

[Mr Nice]

If that's the case where's your evidence these calls have been made in the past?

margin calls are made every ******ing day.

every crash that has ever been usually results from a large number of margin calls.

every time you see a big bank lately taking a few billion in write-downs, that was usually from a margin call.

they HAVE to keep their capital ratios in a certain balance.

If they have a choice between taking those billions out of their own profits, or from the BTL'ers, the choice is rarely on the side of the borrower.

[Dingleberry]

I stated earlier it may be implemented if a LL is defaulting on mortgage.

So you don't believe an across-the-board fall in property prices would be enough to prompt lenders to act so as to protect their investments?

It is fanciful to think that Bradford and bingley is going to ask all their BTL to have another valuation done on all their properties even though they have not missed a payment.

Yes, extreme examples are always fanciful. But bear in mind that BTL is a BUSINESS venture, not a cosy arrangement between a nuclear family and a happy caring sharing bank. As far as the lender is concerned, the borrower's collection of BTL properties is nothing more than a bundle of assets much like any other. There's no reason to suppose that margin calls would be shunned in BTL any more than they would be in any other business venture that involved substantial leveraging.

[eek]

I stated earlier it may be implemented if a LL is defaulting on mortgage. It is fanciful to think that Bradford and bingley is going to ask all their BTL to have another valuation done on all their properties even though they have not missed a payment. But if it makes the bears happy to think so, carry on. Meanwhile back on planet earth......

It depends. What if the bank / pension fund who lent Bradford and Bingley the money asks for another valution before renewing the loan?

While that sounds bad, it is actually nicer than what has happened to Northern Rock. In their case the banks and pension funds have simply said no we won't renew the loan.

Given what has happened to the Northern Rock what approach do you think B+B would take if they need to proof the REAL value of their loans. Would they:-

1) quietly ask for a revaluation on the property.

2) say bugger off, try and find some else to lend them the money and risk having to ask the Bank of England.

While Northern Rock may be an extreme example I believe there are already 167 examples of this sort of request having occured in the States.

Edited October 18, 2007 by eek

[mfp123]

It depends. What if the bank / pension fund who lent Bradford and Bingley the money asks for another valution before renewing the loan?

While that sounds bad, it is actually nicer than what has happened to Northern Rock. In their case the banks and pension funds have simply said no we won't renew the loan.

Given what has happened to the Northern Rock what approach do you think B+B would take if they need to proof the REAL value of their loans. Would they:-

1) quietly ask for a revaluation on the property.

2) say bugger off, try and find some else to lend them the money and risk having to ask the Bank of England.

While Northern Rock may be an extreme example I believe there are already 167 examples of this sort of request having occured in the States.

thats the thing, mortgage lenders like bradford and bingley themselves may face margin calls e.g

http://uk.reuters.com/article/marketsNewsU...934026720070729

the issue here is do private buy to let landlords have the same clauses in their contracts as well?

Edited October 18, 2007 by mfp123

[Sledgehead]

If that's the case where's your evidence these [margin] calls have been made in the past?

Mr Nice is right.

Previously, under Marquess of Queensbury rules, Banks kept their best credit instruments for big boys cos they understood the risks. Now the little guys have been allowed access to the same sorts of funding (securitisation), you have to consider the quid pro quo.

Consider how the Rock was crushed. Investors in the mortgage backed CP markest decided that the returns were just not enough to warrant investing in assests that a ) might default, b ) were no longer properly collateralised (due to property falls). Investors withdrew money from funds that had invested in the debt. That in turn caused a reappraisal of what the debts were worth. Both of these effects meant the funds had too much borrowed money (leverage) as a percentage of portfolio "value". That worried the creditors of the funds. Guess what they asked for? Yep, just when everybody else wanted their money, so too did the levergae providers - they called for margin. The funds went to the markets to borrow short term to plug the margin requirements. Credit to fund leverage. Nobody wants to wear it so the leverage providers seize assets and try and sell them into a falling and illiquid market. Nobody is buying. Theh price falls, the implied yield shoots up. The cost of credit increases and assets once used as collateral will no longer be accepted because the market for these is frozen with fear, so no prices are available. When Northern Rock look for funding, suddenly there's none there.

So what was that quid pro quo I was talking about? Well, if the banks treat you like big boys, giving you access to securitised loans, maybe you should not be surprised when they expect you to take the wrap for margin calls also...

And as for breach of trust etc, need I mention:

Mobile phone cash back deals - broken

Guaranteed pensions - broken

Critical illness cover - denied

ISP services - denied due to "demand"

Low cost carriers - surcharge hell

Free banking - but oh the charges!

Safe savings - but have a minister handy to get your money back

These are off the top of my head. I'm sure you can think of plenty more.

Edited October 18, 2007 by Sledgehead

[doogie]

thats the thing, mortgage lenders like bradford and bingley themselves may face margin calls e.g

http://uk.reuters.com/article/marketsNewsU...934026720070729

the issue here is do private buy to let landlords have the same clauses in their contracts as well?

They probably do, but I believe they would only be invoked if the bank itself was in trouble.

[Uriah Heap]

A fascinating thread.

For folk who were reading the bit about me be run over by a bus, I do have life insurance and I don't owe anybody any money.

I still don't know what to think. I can't imagine a mortgage lender enforcing a margin call - but I couldn't imagine a run on a UK high street bank before last month.

Interestingly, I seriously looked at getting into BTL back in 2001. Seriously enough to pay an £800 arrangement fee on what would have been the first property in my BTL empire. I decided not to mainly because I decided I didn't understand it enough.

Now I dare say some people will think me foolish for not following through, and will imagine that I have lost out. But I don't think life is like that. I don't regret the riches I could have earned. If I had trousered a big wodge it wouldn't have made me feel good. This margin call business was exactly the kind of risk that I was fearing.

An investment that could ruin you overnight without warning isn't for me.

[Woody Finch]

They probably do, but I believe they would only be invoked if the bank itself was in trouble.

...which in a credit crunch, accompanied by falling property prices, is almost bound to be the case

Edited October 18, 2007 by Woody Finch

[FreeTrader]

It's dangerous to assume that such LTV clauses would never be invoked. Just from reviewing the Bank of England's recent auction terms for loans to assist the credit markets, it's clear that banks may be obliged to keep the LTV ratio of their mortgage book below a certain figure in order to secure short-term finance:

36 The Bank will lend against security in the form of prime UK residential mortgage loans. In summary, the Bank’s criteria are as follows:

- All mortgage loans must be denominated in sterling.

- The loan to value ratio (LTV) on individual mortgage loans, taking into account amounts originally advanced as increased or decreased from time to time shall be not greater than 95%.

- The mortgage portfolio charged to the Bank must have a weighted average LTV of 75% or less.

...

http://www.bankofengland.co.uk/markets/mon...ement070921.pdf

[bdon]

Interesting report on an often ignored clause in a rising property market could strangle B2L investors badly should values go south.

http://www.moneyweek.com/file/36564/could-...to-letters.html

I appeared on BBC Breakfast last week with a buy to let investor who was convinced he was very rich. He had, he said, made £8m out of the buy to let boom. Further chat revealed that he had properties valued at £8m but £5.5m worth of debt. So he is on paper ‘worth’ £2.5m. You might think that sounds like a reasonable margin of error but I’m not sure its enough: property can turn nasty fast. Many of the reasons not to invest now (the main one being the fact that yields are lower than interest rates) have been widely discussed but here’s one more reason to steer clear. Buy to let mortgages deals tend to contain little read covenants regarding the loan-to-value ratio of the mortgage. In a rising market this isn’t the kind of thing borrowers take notice of but in a falling market they may find that it is the ruin of them.

It works like this. The loans allow lenders to periodically revalue properties (at the borrowers expense naturally). If the value has fallen and the loan to value ratio has, as a result, risen above the level required by the mortgage (say from 80% to 85%) the lender can then ask the borrower to come up with more cash to get it back down. The result, says my lawyer friend, will be that as capital values drop, buy-to-let investors will start to receive letters from the lenders along the lines of "Dear Mr Bloggs, I should be grateful if you would restore your loan to value ratio by sending us a cheque for £25,000

This, most mortgaged-up-to-hilt investors will be utterly unable to do. The result? Panic selling and not just from the market’s new entrants. People who have been in the market for more than a few years are keen to suggest that they will be immune from any drop in prices thanks to the equity they have built up. But most of them – the man I met on the BBC sofa included - have also bought new properties in the last year. If margin calls – for this is what they are - start coming in on these how are they going to come up with the cash? No one’s immune.

Absolutely true - but this is where the subtleties will lie - the banks can't do it too quickly otherwise their assets (and these mortgages and loans do appear as assets on the books) will be reduced. But they can't to it too late either or the risk will increase and it may default and have to be sold at auction for significantly reduced price.

Banks (like any plc) exist to make profit. Their model is to squeeze as much debt out of people as possible [more debt=more interest=more profit]. The balance to this is the other companies who also want to make profit [reduce overheads=low wages=more profit].

So we have this dynamic in the economy where each pushes against the other. Occasionaly governments intervene and mess things up - but generally the cycle turns. This is the necessary and fundemental cycle of all healthy economies.

When governments go too far (Zimbabwe) they upset the fundemental harmony and disaster ensues.

Cycles are healthy - they allow growth and innovation - but as sure as eggs is eggs bubbles pop. And then the wheel turns again.

[Havoc]

6 pages of out and out bull s**t.

Just checked my standard life btl contract and no mention of this.

Sometimes I think the people on this website are the drama queens of the housing market.

I hope those two maths teachers in Kent can say exactly the same thing.

[steve99]

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.

''Banks aren't altruists'' No they are fully qualified sociopaths. I remember the last crash, their true personality quickly came to the fore.

[Sledgehead]

''Banks aren't altruists'' No they are fully qualified sociopaths. I remember the last crash, their true personality quickly came to the fore.

... hence the familair banks & umbrella maxim.

[pimperne1]

''Banks aren't altruists'' No they are fully qualified sociopaths. I remember the last crash, their true personality quickly came to the fore.

Although we are not actually talking crash here, we are talking your LTV being compressed and the lender taking action then.

[Uriah Heap]

I hope those two maths teachers in Kent can say exactly the same thing.

I am sure they are too smart to get caught out - but it would be good if they were.

I really hate them two.

[Bloo Loo]

I think the point here is being missed by both sides

The bank has lent money based on security- and they have at some time, valued that security and have lent on it. If the security on which they have lent no longer covers the loan, then they will need to ensure the borrower offers some other security to cover.

In the event of the LTV falling negative, then the security offered by the borrower no longer meets the terms of the mortgage and needs to be reviewed.

the bank has done this many times in the past, an example being with secured overdraft facilities, where they have reduced the overdraft (usually in times of stress) by the equivalent of any deposits coming in.

This led to massive small business failures in the 1989-1992 crash.

Beleive me, they cover themselves first, your family can go hang.

[pimperne1]

I think the point here is being missed by both sides

The bank has lent money based on security- and they have at some time, valued that security and have lent on it. If the security on which they have lent no longer covers the loan, then they will need to ensure the borrower offers some other security to cover.

In the event of the LTV falling negative, then the security offered by the borrower no longer meets the terms of the mortgage and needs to be reviewed.

the bank has done this many times in the past, an example being with secured overdraft facilities, where they have reduced the overdraft (usually in times of stress) by the equivalent of any deposits coming in.

This led to massive small business failures in the 1989-1992 crash.

Beleive me, they cover themselves first, your family can go hang.

Not at all. It is exactly this point that has caused this discussion. In fact your submission might include the mortgages of Owner Occupiers which would make the thread much more interesting.

[Bloo Loo]

Not at all. It is exactly this point that has caused this discussion. In fact your submission might include the mortgages of Owner Occupiers which would make the thread much more interesting.

well, yes, it does involve normal mortgages as well, but in a different way.

If you are foreclosed, and you have insufficient equity, in your home to cover the remaining mortgage capital, the bank will come after you for the rest.

The difference, is that probably in the Business mortgage, the bank will want protection BEFORE foreclosure, so that in the event, the business does not fold to avoid paying the difference. the private person however, does not disappear except in death or personal bankruptcy

[Fishfinger]

A fascinating thread.

For folk who were reading the bit about me be run over by a bus, I do have life insurance and I don't owe anybody any money.

I still don't know what to think. I can't imagine a mortgage lender enforcing a margin call - but I couldn't imagine a run on a UK high street bank before last month.

Interestingly, I seriously looked at getting into BTL back in 2001. Seriously enough to pay an £800 arrangement fee on what would have been the first property in my BTL empire. I decided not to mainly because I decided I didn't understand it enough.

Now I dare say some people will think me foolish for not following through, and will imagine that I have lost out. But I don't think life is like that. I don't regret the riches I could have earned. If I had trousered a big wodge it wouldn't have made me feel good. This margin call business was exactly the kind of risk that I was fearing.

An investment that could ruin you overnight without warning isn't for me.

Yup in the end we didn't either and I do something a lot less riskier and which I understand err.. play poker.