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Rising Tide Of Bad Debts Will Flood Over Banks

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http://www.telegraph.co.uk/money/main.jhtm.../11/ccom111.xml

So far we have escaped a US-style sub-prime meltdown. We may never see anything so bad, but it's going to be a close call. House prices are falling at a faster rate than the late 1980s-early 1990s slump. House prices generally relate to highly-geared assets (mortgages on homes). As prices fall at rates not seen since the 1930s, equity is vanishing with a rising tide of negative equity the result.

As long as people stay employed and can carry on servicing their debt, they can sit tight and wait for prices to recover to restore their equity. But with more people losing their jobs and the cost of servicing the huge debt pile already taken out, such as credit cards and other unsecured credit, mortgage arrears and repossessions will rise.

Optimists point out that although repossessions have started to rise, they're still way below the levels endured at the height of the last recession. But that's because we're still only at the beginning of this recession.

Over the next 18 months banks are going to face a rising tide of bad debts, arrears and repossessions. The worst hit will be those lenders who have focused on high loan-to-value lending, the buy-to-let market and the self-certification mortgage market where borrowers became their own credit controllers. Another source of worse-than-usual bad debts will come from the large loan books that some high street lenders bought from specialist rivals in a bid to bulk up in the boom.

All of this brings me back to Bradford & Bingley. Assuming it succeeds in raising its £400m capital injection from shareholders it will be, in the happy words of its executive chairman Rod Kent, one of the best capitalised banks in Britain. Phew, because it's going to need to be. Given the profile of its lending (buy-to-let, specialist loan books and so on) it could be one of the worst hit for arrears and further losses and write downs on bad debts. It's going to need the capital it's raising now, not to give it a chance of weathering the onslaught to come, but to give it breathing space until a takeover can be agreed or a run off of its business arranged.

The only engineers you need in the house building trade these days are financial ones. Barratt Developments has sold 43pc less houses in the past six months than the corresponding period in 2007 but is still geared up with debt and a workforce designed for the boom.

Mark Clare, Barratt's chief executive who was finance director of Centrica, has been busy with his financial tool box trying to reinforce the company's financial foundations in the hope that it will be left standing come any recovery. The subsidence showing up on Barratt's balance sheet has been spreading alarmingly and, without yesterday's urgent action, the company's future would have been questionable. It's managed to survive without raising fresh capital but shareholders should put the champagne on hold.

On the debt, it has agreed a refinancing package which gives it breathing space. But this comes at the cost of its interest burden soaring by a third. Paying down this debt now becomes a priority so it must convert shareholders' assets for cash and then pass the cash to the banks. For the foreseeable future, Barratt is working for its banks, not shareholders.

Staying employed in this mess might be tricky, companies can only pay workers if they are making money and breaking even, it's hard to see who that will continue with consumers stopping spending in a consumer driven economy.

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I once heard that it only takes one mortgage going bad to kill the profitability on another 100 mortgages.

With one million buy to lets, countless sub-prime mortgages plus the coming tsunami of defaulting unsecured and credit-card debt, I don't quite see how the banks can survive*.

* other than in this surreal world of government-backed banks, implicitly or explicitly stated.

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Im starting to think i should of sold the few shares i have left in lloyds tsb. I thought that they and one or two other banks might come out of this alive and be able to get a much bigger market share between them. Now im thinking that no banks, not lloyds, not HSBC or anyone will come out of this.

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http://www.telegraph.co.uk/money/main.jhtm...cnusmort111.xml

William Poole, former president of the St Louis Federal Reserve, believes both are insolvent as a result of heavy losses, pointing out that Freddie, the smaller of the two, owed $5.2bn more than its assets were worth at the end of the first quarter. "Congress ought to recognise that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," he said.

Although it is understood the administration has yet to finalise a plan should something happen to either Fannie or Freddie, the main options are either a funding injection from the Federal Reserve or fundraising from investors.

Fannie led some investors to believe that it is running out of money on Wednesday when it offered a record coupon on the sale of $3bn of two-year loan notes, with the company's credit default swaps implying that its AAA-rated debt is actually trading five credit notches lower.

It appears that the whole system is insolvent. Prices shouldn't be allowed to fall then this sort of thing wouldn't happen ;)

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I once heard that it only takes one mortgage going bad to kill the profitability on another 100 mortgages.

Here's a real world case - my last landlord's flat got repossessed. He had something like a 95% mortgage on the 170K purchase price. It's up for auction next week at 85K.

The guy's probably fled to Nigeria or something, leaving the bank out of pocket by over 50K.

Off the top of my head, my own bank probably banks £140 a year from my own mortgage assuming it lends at a rather generous 2% more than it can raise the funds (up until last year, the figure was nearer 1%).

That means it needs around 20 people like me paying a mortgage for 25 years to recoup the 50K. Oh well they can probably try and flog half of them mortgage protection insurance or something.

Ouch! <_<:unsure:

P.S. Don't flame me if my maths is pants :o .

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I once heard that it only takes one mortgage going bad to kill the profitability on another 100 mortgages.

With one million buy to lets, countless sub-prime mortgages plus the coming tsunami of defaulting unsecured and credit-card debt, I don't quite see how the banks can survive*.

* other than in this surreal world of government-backed banks, implicitly or explicitly stated.

Indeed I think this was one of the biggest flaws in Northern Rocks business, that the profit margins were wafer thin, the volume of mortgages being the driver. Your statistic wouldnt surprise me.

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Its not just mortgages going bad that are going to flood over the banks ,what about all the sub prime credit card and loans that have been given out. Every single person I talk to will tell me about someone they know who is up to their neck in debt and to put it bluntly will f--k up soon. There is going to be loads of them. As the ression gains pace more and more people are going to be unable to pay their mortgages and all the other debts that they have built up to levels that they cannot cope with now whilst they still have their jobs.

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  • 399 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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