Negative Equity

[cells]

was talking to a class A property sheep over dinner. he has done well for himself but is pretty ignrant in some ways

Me: what would happen if your two BTL went down 20% in value.

Him: i dont think they will go down that much, maybe 2-5%

Me: Ok but just pretend for a moment, what would happen if they went down 20%

Him: id still keep them, i dont think property in the long term will go down

Me: ok, but when your 2-3 year fixed mortgage ends what will happen

Him: what do you mean

Me: what will you do

Him: i will remortgage to another fix probably or go on a tracker

Me: ok but your property has gone down in value 20%, and the banks now want at lest 20% equity.

Him: what do you mean

Me: assume you bought a 250k home for 225k. now the 250k home is worth 200k because it has gone down 20%. The bank also now only gives out 80% mortgages. So he will only let you remortgage for 80% of the value. Thats 160K.

Him: What do you mean

Me: you will not be able to get a remortgage, or a new mortgage with someone else if you owe more than 160k on a 250k home. so you will be forced to stay with your current lender and pay their SVR which s probably something like 8%.

him laughing: that won’t happen, but if it did i would be a bit screwed.

[Timm]

10 YOU ARE CRUEL

20 YOU PLANNED THAT CONVERSATION, DIDN'T YOU?

30 GOTO 10

[cells]

i think this is going to catch a LOT of people out

it may be extreamly deficult or impossible for a lot of people in the near future to remortgage onto a competitive rate.

a lot of people might not only find that interest rates ahve gone up from 4.5% to 6% but they cant even get the 6% mortgage and have to pay a 8% SVR

this is the first time i think we might see 50% falls from peak!

[cells]

10 YOU ARE CRUEL

20 YOU PLANNED THAT CONVERSATION, DIDN'T YOU?

30 GOTO 10

nope, wasnt planned.

he was winning the argument because i couldn’t credibly argue that home in the long term would not go up

then a few min of silence and other conversation, then it hit me, if he gets into negative equity he may be forced to stay on his SVR which could mean his rent might not even cover half his mortgage

[thecrashingisles]

Upside Down by Diana Ross is a good record to play when you throw a party for your BTL friends.

[the_austrian]

Ask him what would happen to his investment if we got rid of legal tender laws.

[Guest KingCharles1st]

really- I mean really- is this likely to happen. If the borrower has been paying on the dot full amount for say three to five year history, are some of you still thinking that re-mortgage with another company scenario is going to to be a case of COMPUTER SAYS NO...

Well if it IS- then- KERRRRIIISSSSTTT...

[winkie]

Upside Down by Diana Ross is a good record to play when you throw a party for your BTL friends.

Or this:

http://uk.youtube.com/watch?v=ZZyTmszwi8E

[Bloo Loo]

really- I mean really- is this likely to happen. If the borrower has been paying on the dot full amount for say three to five year history, are some of you still thinking that re-mortgage with another company scenario is going to to be a case of COMPUTER SAYS NO...

Well if it IS- then- KERRRRIIISSSSTTT...

course- thats what happens when mortgage cos want 80% LTV- you gotta provide 20% equity.

[Guest KingCharles1st]

Also -IF mortgage rates continue to increase at the current rate- and I don't see 10% any longer as unthinkable- then with a 1% hike on a large property (poss because of swtiching to SVR)- and the landlord only being able to increase by 5% P.a. then can somebody do the sums and join up the dots pls

[Bloo Loo]

Also -IF mortgage rates continue to increase at the current rate- and I don't see 10% any longer as unthinkable- then with a 1% hike on a large property (poss because of swtiching to SVR)- and the landlord only being able to increase by 5% P.a. then can somebody do the sums and join up the dots pls

F.....o.....r.....c.....e....d.....s.....a....l....e

[Guest KingCharles1st]

course- thats what happens when mortgage cos want 80% LTV- you gotta provide 20% equity.

you are suggesting the ywill NOT screen lenders and offer leniency in bona fide good payer cases-

Ummm well in this case- it seems the banks and other city players are EXPECTING and preparing for this- but there seem to be two giggling little schoolkids that dont seem to have anticipated it- wonder who they are...

[Harold Bishop]

i think this is going to catch a LOT of people out

Correct. People don't understand this. Further, they do not understand a 100% rise in value is a 50% drop in value. A BTL is a business (if its been correctly declared to the lender) and the lender may insist on the 20% equity, meaning even the SVR will not be available. Worst case, the lender may ask the mortgagee for a lump sum payment to get the LTV ratio right. Private house buyers just get stuck on a crap SVR and negative equity. BTLers in this situation will have to sell.

[Bloo Loo]

you are suggesting the ywill NOT screen lenders and offer leniency in bona fide good payer cases-

Ummm well in this case- it seems the banks and other city players are EXPECTING and preparing for this- but there seem to be two giggling little schoolkids that dont seem to have anticipated it- wonder who they are...

I assume you meant borrowers in line 1. Why would the bank reduce its criteria for a new borrower in spite of a good track record- this is the only type of borrower most will accept these days.

Course the borrower has the option to stay with his current lender, but they will get onto the SVR or whatever was agreed. it means they may well be trapped into the higher rate with no opportunity to move.

[richc]

Can I ask a dumb question of anyone who wants to reply? I'm an American who moved to the UK a few years ago and I don't understand the different effect of negative equity between here and the US. In the United States, if you take out a mortgage, the loan is only secured against the house. It's what I guess is call non-recourse, in that, if you stop paying the mortgage, all the bank can do is seize the house, not take any of your other assets or put a lien on your income. If your house is foreclosed in the US, the bank seizes the house and it goes on your credit record, but that's about it. This is why the US has such a bad foreclosure problem right now -- house prices have declined and all the people who took out 100% LTV loans, most of whom already had bad credit to start with, are now just mailing the keys to the bank and walking away, i.e. jingle mail. You don't hear many people in the US complain about negative equity because most people in that situation just walk away. My question is, can you do this in the UK, or can banks here lay claim to your other assets and income if you stop paying a mortgage?

[bob monkhouse]

I love the understatement in the use of the phrase 'deep doo doo' when describing negative equity. Its like saying 'whoopsy daisy' after running over an old lady.

[Guest KingCharles1st]

ahhhhh.......

[piece of paper]

Can I ask a dumb question of anyone who wants to reply? I'm an American who moved to the UK a few years ago and I don't understand the different effect of negative equity between here and the US. In the United States, if you take out a mortgage, the loan is only secured against the house. It's what I guess is call non-recourse, in that, if you stop paying the mortgage, all the bank can do is seize the house, not take any of your other assets or put a lien on your income. If your house is foreclosed in the US, the bank seizes the house and it goes on your credit record, but that's about it. This is why the US has such a bad foreclosure problem right now -- house prices have declined and all the people who took out 100% LTV loans, most of whom already had bad credit to start with, are now just mailing the keys to the bank and walking away, i.e. jingle mail. You don't hear many people in the US complain about negative equity because most people in that situation just walk away. My question is, can you do this in the UK, or can banks here lay claim to your other assets and income if you stop paying a mortgage?

Yes.

p-o-p

[piece of paper]

Correct. People don't understand this. Further, they do not understand a 100% rise in value is a 50% drop in value. A BTL is a business (if its been correctly declared to the lender) and the lender may insist on the 20% equity, meaning even the SVR will not be available. Worst case, the lender may ask the mortgagee for a lump sum payment to get the LTV ratio right. Private house buyers just get stuck on a crap SVR and negative equity. BTLers in this situation will have to sell.

Can't. The lender will not release the deeds unless the mortgage is discharged.

p-o-p

[DabHand]

Really? I hear that in America the IRS considers any let off on neg equity walk aways as unearned uncome. The moment you pop up again in the good citizen paying tax database they knock on you door with a hefty bill.

If you declare bankruptcy then yes all claims are off after settlement. For most people with one home, walking away would probably equal taking the bankruptcy route. However a multiple home BTLer can't pick and choose to walk away owing more than a homes value and not be chased for the difference.

Think about it for a second, take one BTLer with 100% loans out on x number of houses. Some then go neg equity, so you get to walk away from those but keep the others with no consequence? All the upside and no risk to the BTLer with all the risk being held by the lending bank?? Don't think so!

[whoami]

Really? I hear that in America the IRS considers any let off on neg equity walk aways as unearned uncome. The moment you pop up again in the good citizen paying tax database they knock on you door with a hefty bill.

I believe that rule has been suspended in the US, at least for the duration of the current 'emergency'.

[microbe]

My question is, can you do this in the UK, or can banks here lay claim to your other assets and income if you stop paying a mortgage?

It used to be the case, back when building societies were mutuals, that they generally didn't pursue borrowers, even though they could. I think the reasons for this were that repos were rare, the amounts left outstanding tended to be quite small and the cost and effort of chasing after it was not generally worth it. This changed in the 88-90 crash. A lot of them had morphed into banks and the scale of the losses from their irresponsible lending forced them to chase people for whatever they could get.

This time, the scale of incompetence and irresponsibility (not to mention, fraud, Eric) has been huge, so I think it is sensible to expect repos to be fast and inflexible, sell offs to be managed for speed, rather than maximised selling prices (even though they will still be bound to 'show' they got market price), and the pursuit of former mortgagors to be brutal.

EDIT: Oh yes. When this gets into full swing, it is going to help push prices down further and faster than would otherwise have been the case, because would be FTBs are going to be shit scared of buying.

Edited March 16, 2008 by microbe

[southsea13]

10 YOU ARE CRUEL

20 YOU PLANNED THAT CONVERSATION, DIDN'T YOU?

30 GOTO 10

This is brilliant - in `my` Forbidden Question thread we`ve seen references to 2000AD; now it`s the return of BASIC. Can`t wait for the mullet haircut (oops I forgot my hair`s fallen out!!!)

[Little Professor]

Can I ask a dumb question of anyone who wants to reply? I'm an American who moved to the UK a few years ago and I don't understand the different effect of negative equity between here and the US. In the United States, if you take out a mortgage, the loan is only secured against the house. It's what I guess is call non-recourse, in that, if you stop paying the mortgage, all the bank can do is seize the house, not take any of your other assets or put a lien on your income. If your house is foreclosed in the US, the bank seizes the house and it goes on your credit record, but that's about it. This is why the US has such a bad foreclosure problem right now -- house prices have declined and all the people who took out 100% LTV loans, most of whom already had bad credit to start with, are now just mailing the keys to the bank and walking away, i.e. jingle mail. You don't hear many people in the US complain about negative equity because most people in that situation just walk away. My question is, can you do this in the UK, or can banks here lay claim to your other assets and income if you stop paying a mortgage?

Yep, in many US states mortgages are non-recourse so that the homeowner can just mail the keys back to the lender and walk away from the remaining debt.

You can't do that here, if your house gets repossessed and the sale amount doesn't cover the outstanding mortgage, the lender can chase you for the shortfall till kingdom come. I don't think they can la claim to your other assets, as the loan wasn't secured on them, but they can still chase it as a delinquent unsecured loan through the civil courts.

[iow2007]

so, have i got this right ?

example: if i put 60% of the home value down as deposit, mortgage the remaining 40% fixed for 5 years.

during which the house value drops 20%, you think that i wouldn't be able to remortgage to another fixed rate ? or have i misread this neg equity thread ?