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Why Bother To Lend To Sub-prime ?

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Guest barebear

Someone help me get my head around this.A lender lends shed loads of money to sub-prime with lets say 2% above the going rate to cover the 'risk'. The borrower is likely to have ccj's and sometimes an unlimited amount. They then have the security of a property. O.k. so the borrower moves into the property and starts paying council tax. Suddenly he's now traceable and his previous debts catch up with him and now realise he has an asset so they stick a charge on it and wait until theres enough equity then force a sale.In the meantime the borrower realises whats going to happen throws his hands up and decides its not worthwhile paying the mortgage and sits there till he gets repossessed.

Surely given these circumstances,why would any lender lend to sub-prime ?? Especially the ones that lend to unlimited ccj's.

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Guest barebear
Surely given these circumstances,why would any lender lend to sub-prime ?? Especially the ones that lend to unlimited ccj's.

Because property only ever goes up !!! How can they lose!!!

You cant tell me these lenders with decades of history behind think that property only go's up !!

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Surely given these circumstances,why would any lender lend to sub-prime ?? Especially the ones that lend to unlimited ccj's.

Because property only ever goes up !!! How can they lose!!!

But if the average mortgage lasts for around three or four years and property has gone up since 1995 (the last twelve years) that extra 2% is money for old rope. Even if they do get in trouble, they can borrow their way out of it and if they don't thn the equity will cover you.

That's before they changed the rules back in July 2007. Lot's or rules changed back then.

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Guest barebear
But if the average mortgage lasts for around three or four years and property has gone up since 1995 (the last twelve years) that extra 2% is money for old rope. Even if they do get in trouble, they can borrow their way out of it and if they don't thn the equity will cover you.

That's before they changed the rules back in July 2007. Lot's or rules changed back then.

What rules were changed ?

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Someone help me get my head around this.A lender lends shed loads of money to sub-prime with lets say 2% above the going rate to cover the 'risk'. The borrower is likely to have ccj's and sometimes an unlimited amount. They then have the security of a property. O.k. so the borrower moves into the property and starts paying council tax. Suddenly he's now traceable and his previous debts catch up with him and now realise he has an asset so they stick a charge on it and wait until theres enough equity then force a sale.In the meantime the borrower realises whats going to happen throws his hands up and decides its not worthwhile paying the mortgage and sits there till he gets repossessed.

Surely given these circumstances,why would any lender lend to sub-prime ?? Especially the ones that lend to unlimited ccj's.

Because they sold the debts on. Once you break the link between the lender and any risk of the debt going bad, prudence is irrelevant. Issue mortgage, sell it on, collect big profits / bonuses. Somewhat simplified, but that's the general idea. In Ye Olden Days (godd or otherwise) the banks/ building societies took in deposits and lent them out, collecting the money back in over a period of years so they wanted to know the borrower was sound. If you can unload the debt to someone els there's no need to check affordability etc.

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The bad risk borrower doesn`t get pursued for the house from other lenders because he is making minimum payments through an iva or some other arrangement, house prices are speeding up nicely (the lender thinks) and as long as the borrower keeps making his monthly payments everyone is happy, if he doesn`t the bank reposseses the house, sells it at auction to re-coup some of the debt and then proceeds to chase the borrower to the grave for the rest of the money. The borrower will make an agreement to pay minimum monthly amounts to the bank and move on to his next credit arrangement with someone else.Everyone is happy for the moment. Then the once in a thousand year systemic failure comes along, causing a massive credit crunch, and f*cking everything up for borrower and lender.the people making credit decisions at banks are not old enough to remember the woes of past decades, and it is their job to make decisions based on current circumstances.It`s all f*cked up now and we have a front row seat on this site don`t we. The future is a return to council housing, and low rent apartments for working families.

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Surely given these circumstances,why would any lender lend to sub-prime ?? Especially the ones that lend to unlimited ccj's.

I can answer this in 1 word....

BONUSES.

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I used to work for a well known building society, in the head office, so was privy to the management announcements and associated gossip.

Basically, when we started doing sub-prime business, it was because the mainstream mortgage makret was so cut throat that we just weren't making any money on it, so we diversified our brand into anything we felt we could sell alongside traditional products (building soc savings accounts and regular mortgages), and this included sub-prime. This must have been 4 years ago or so.

It was indeed perceived, as official policy from the chief economist, that house prices could not fall and the 2% extra on sub-prime mortgage business thereby rendered it profitable, in contrast to the normal mortgage busines which, as you may remember, we were not making any money on (or so the internal rumours suggested).

so yes, medium-term muddled management thinking, imho. If they weren't making money on their core products then maybe they should have backed out of the mortgage market - but then what's a widget company to do with itself if it can't sell widgets anymore?

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Words like Prime and Sub-prime are all really meaningless are they not? AAA ratings etc, a good guide for an investor? probably not any more. The main thing is are the sheeple going to keep playing the debt game? It looks for the moment that the banks are less and less willing to play.

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Because they sold the debts on. Once you break the link between the lender and any risk of the debt going bad, prudence is irrelevant. Issue mortgage, sell it on, collect big profits / bonuses. Somewhat simplified, but that's the general idea. In Ye Olden Days (godd or otherwise) the banks/ building societies took in deposits and lent them out, collecting the money back in over a period of years so they wanted to know the borrower was sound. If you can unload the debt to someone els there's no need to check affordability etc.

exactly - debt flipping - and until the debt buyers pulled the plug, it was easy money

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Someone help me get my head around this.A lender lends shed loads of money to sub-prime with lets say 2% above the going rate to cover the 'risk'. The borrower is likely to have ccj's and sometimes an unlimited amount. They then have the security of a property. O.k. so the borrower moves into the property and starts paying council tax. Suddenly he's now traceable and his previous debts catch up with him and now realise he has an asset so they stick a charge on it and wait until theres enough equity then force a sale.In the meantime the borrower realises whats going to happen throws his hands up and decides its not worthwhile paying the mortgage and sits there till he gets repossessed.

Surely given these circumstances,why would any lender lend to sub-prime ?? Especially the ones that lend to unlimited ccj's.

Risk in banking is often misunderstood. Most bank managers see default risk as the major risk. THat is, the customer doesn't pay it back and bank has to take the loss.

However, imagine a business where you lend out at 33% per annum to people who can't get a decent loan rate. Now, some of those people tend to default, pay late, do a runner, etc. But say that the number of them doing that is 5% each year.

Imagine you've done £1bn of such lending. You see a profit of £330m per annum.

The 5% defaulters cost you 5% of the £1bn. So your losses amount to £50m.

Your profits are £280m.

A good business. Definitely sub-prime customers - but sweet profits.

The risk in the above model is if one year 5% of your customers default, but then in another year 50% of your customers default. Then the profit stream is £280m in year 1, -£360m in year 2 (assuming only half pay the interest too!).

Now imagine the average over the long term of such a business (taking the good years and the bad years is positive - say £200m). It is a good business to own - but you have to make sure you have deep enough pockets to carry through the bad years.

So sub-prime can be very good, provided you can make a good enough long-term return to offset the variability of the profits over many years.

The return you'd want to make depends on the volatility of the returns. So low volatility business (ie very predictable profits) would typically attract low profits. On the other hand - very volatile business (some years huge profits, and some years huge losses), would tend to allow large profits.

The problem in recent years is that more and more banks (and companies like GM) have wanted a slice of the high default rate, high interest rate market. Competition has driven down the rates, and the banks have misjudged how much profit they need to compensate for the losses in the bad years.

This analysis holds also for deposits. If you put your money in the BoE - via National Savings - the returns are the lowest, because the default rate is very low (or maybe nil). If currently, you put your money into some dodgy Icelandic bank (for example) they'll pay much higher interest, but you'll be taking risk (in that in some years you'll lose some or all of your deposit).

So sub-prime can be good provided you get sufficiently high average returns to compensate for the variability of the return.

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Here is some A4 paper and some ink.

Would you swap this for rights to a house?

Yes?

Then now you know why they are willing to lend to sub prime borrowers.

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As far as the high LTV stuff's concerned, part of the problem is once prices have risen beyond a certain level, what else do lenders do if they want to carry on lending? Quite simply, the 5x, 6x, 7x loan, the self-cert *cough* loan to those who could very easily prove their income, and all those other "risky" products are simply a response to market conditions... once one lender's doing it, the others have either got to follow suit or risk losing market share, and they've all got to keep going until the music stops because if enough of them wimp out it'll stop the music anyway. What happens when the music stops? Property prices drop, thereby making risky loans look much, much riskier.

The banks have had the choice of either stopping the music themselves, and inflicting pain upon themselves, or waiting for someone to come in and nick the hifi. They went with the latter.

(I still put about 70% of the blame on the borrowers though...)

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I can answer this in 1 word....

BONUSES.

....and that's just for the lenders ...the broker or salesman makes up-front commission when the loan is approved and possibly doesn't live so well unless he maintains the turnover.....a chain of no sense...ending in debt and misery..... <_<

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Because they sold the debts on. Once you break the link between the lender and any risk of the debt going bad, prudence is irrelevant. Issue mortgage, sell it on, collect big profits / bonuses.

And teaser rates provide a window of opportunity to sell the loans on before they default.

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The reason for subprime lending is big fat bonuses for the greedy barstewards at the top. They flog thousands of subprime which are then put together as a 'lot'. This is then sold on after being rated by credit agencies. The credit agencies rate it highly. why? because they are being paid for by the lender and if it is not rated high enough they will not be doing business again.

They then flog the lot for loads of money because it is rated AAA. Large bonuses all round and by the time they work it all out the mortgages are crap it's too late. What are they going to do ask for them back. Basically it is/was for the bonuses now and who gives a 5hit about the future. Would have you killed the goose that laid the golden eggs?

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  • 293 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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