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hedi

Technical Point Re Mortgages

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from what i have heard we are about to enter a new period of downturn in mortgages. we all know that the northern rock went under because if lent long and borrowed short. fatal at the best of times. well my understanding was that they were borrowing on the three and six month basis, which come last summer, was belly up for them. now all ,and i repeat all the lenders have been lending long and borrowing short, but they had the foresight to do longer term deals, ie 18 months or two years. this is where the trouble starts, from what i believe, time is up. the city and govenments had hoped that the mortgage backed securitizations markets would be open by now, they are not.

and the autumn is the begining of the time that a lot of these mbs come to an end. i think that any plans for help towards the housing market is just a plan to help out the lending long borrowing short positions that the banks find themselves in. i dont think that this will be any new monies for the market. just an attempt to stave off a complete collapse in the banking system, as the banks have to bring back all these loans onto their books, which they technically can not do.

shoot me down if im barking up the wrong tree, but that is my understanding of where we are going from now. and if i am right then all talk of govenment helping out the market to new highs is very wishful thinking.

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from what i have heard we are about to enter a new period of downturn in mortgages. we all know that the northern rock went under because if lent long and borrowed short. fatal at the best of times. well my understanding was that they were borrowing on the three and six month basis, which come last summer, was belly up for them. now all ,and i repeat all the lenders have been lending long and borrowing short, but they had the foresight to do longer term deals, ie 18 months or two years. this is where the trouble starts, from what i believe, time is up. the city and govenments had hoped that the mortgage backed securitizations markets would be open by now, they are not.

and the autumn is the begining of the time that a lot of these mbs come to an end. i think that any plans for help towards the housing market is just a plan to help out the lending long borrowing short positions that the banks find themselves in. i dont think that this will be any new monies for the market. just an attempt to stave off a complete collapse in the banking system, as the banks have to bring back all these loans onto their books, which they technically can not do.

shoot me down if im barking up the wrong tree, but that is my understanding of where we are going from now. and if i am right then all talk of govenment helping out the market to new highs is very wishful thinking.

For some lenders the position may well be as you describe... for others their exposure to the wholesale markets is much less, particularly for instance with the building societies, and high street banks... it is really only those who had a small savings base which grew out of all proportion using the wholesale markets who got damaged.. most of those have now either stopped or heavilly curtailed their lending..... wholesale funding does however effect the whole market but looking at the current players I don't think we'll see then curtailing their current levels of business and in fact their is some evidence that they are looking to push their volumes in the light of the fairly dramatic transaction drop off we have seen.

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from what i have heard we are about to enter a new period of downturn in mortgages. we all know that the northern rock went under because if lent long and borrowed short. fatal at the best of times. well my understanding was that they were borrowing on the three and six month basis, which come last summer, was belly up for them. now all ,and i repeat all the lenders have been lending long and borrowing short, but they had the foresight to do longer term deals, ie 18 months or two years. this is where the trouble starts, from what i believe, time is up. the city and govenments had hoped that the mortgage backed securitizations markets would be open by now, they are not.

and the autumn is the begining of the time that a lot of these mbs come to an end. i think that any plans for help towards the housing market is just a plan to help out the lending long borrowing short positions that the banks find themselves in. i dont think that this will be any new monies for the market. just an attempt to stave off a complete collapse in the banking system, as the banks have to bring back all these loans onto their books, which they technically can not do.

shoot me down if im barking up the wrong tree, but that is my understanding of where we are going from now. and if i am right then all talk of govenment helping out the market to new highs is very wishful thinking.

Interesting point. The problem NR had has been solved (they could have dumped their mortgages on the BoE £50bn for any old crap scheme. So when these mbs come to an end, they always have the option of getting the cash from the BoE. But, that scheme is limited to £50bn at present (although they don't publish how much is used, and they said at the time that it would increased if needed). However, the pound would be further weakened if the scheme has to be enlarged. I would guess that £50bn is no where near enough if the MBS markets don't re-open.

The biggest issue, surely, is that the UK housing falls are only just starting, and we're not yet seeing high levels of mortgage defaults. When the knock-on effects on the wider economy start to be felt, then all the UK banks will be in trouble.

As to the government, they're not really doing much at all. I think they know they can't do much to prevent the housing market tanking, and so they are concentrating on foreign visits, and will try a relaunch in the autumn.

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Lending long and borrowing short is one thing . But how are the banks going to deal with massive losses now being seen on the repossessed propities . We have all seen the loses on flats in such places like Leeds and Ipswitch to name just a few . £100,000 is not uncommon. Will these losses just get dumped on the bank of England, and how many losses will 90 billion cover?

Edited by miko

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Genius isn't it borrowing large sums of money against an asset that's value is greatly determined by opinion.

This idea isn't flawed providing the asset keeps rising but once opinion turns and views the asset as over priced you are in serious trouble.

If money is like energy and cannot be destroyed where has it all gone? Is their a zero sum position in all of this?

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Lending long and borrowing short is one thing . But how are the banks going to deal with massive losses now being seen on the repossessed propities . We have all seen the loses on flats in such places like Leeds and Ipswitch to name just a few . £100,000 is not uncommon. Will these losses just get dumped on the bank of England, and how many losses will 90 billion cover?

Predicting the potential credit losses the banks would suffer if say prices fell 30% and 10% of the homes were reposessed would be an interessting exercise... of course if that happened we'd also need to factor in unrecoverable extra losses (from norm) that they would suffer from their credit card books, loan books and overdaft books.... I am sure some clever devil will have factored this in and it the share prices will have it built in.... crudely I suppose if share prices have halved then we might expect the expectation to be that profits will at least halve in the major banks.. although the share price will also obviously contain other bets (bank failure, asset writeoffs, goodwill writeoffs, restrucutring costs etc etc )

I'd be interessted to know if anyone knows what happened to bank profits and share prices and credit losses (macro) in the five years running up to 1989/1990 , in the five years housing was sinking or on the floor and in the first five years after that...... that I suppose might give us all a steer on what might happen in the banking world this time around.

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we all know that the northern rock went under because if lent long and borrowed short. fatal at the best of times.

Borrowing short and lending long is what banks do. The trick is to manage the borrowing and lending so that one doesn't get caught out,

Peter.

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Predicting the potential credit losses the banks would suffer if say prices fell 30% and 10% of the homes were reposessed would be an interessting exercise... of course if that happened we'd also need to factor in unrecoverable extra losses (from norm) that they would suffer from their credit card books, loan books and overdaft books.... I am sure some clever devil will have factored this in and it the share prices will have it built in.... crudely I suppose if share prices have halved then we might expect the expectation to be that profits will at least halve in the major banks.. although the share price will also obviously contain other bets (bank failure, asset writeoffs, goodwill writeoffs, restrucutring costs etc etc )

I'd be interessted to know if anyone knows what happened to bank profits and share prices and credit losses (macro) in the five years running up to 1989/1990 , in the five years housing was sinking or on the floor and in the first five years after that...... that I suppose might give us all a steer on what might happen in the banking world this time around.

From what I recall, the biggest fall out for the banks last time was in lending to companies. Actual house prices hardly fell in the last "HPC", the big falls were in real-terms accounting for inflation. Hence, not that many people defaulted from negative equity. (something like 11% drop from peak), so only the last few to sign up for 90% or higher would have been in trouble that would have hit banks badly.

I think it is entirely different this time. The mortgages are packaged up and distilled into chunks whereby the most toxic parts remain with banks... they won't escape if UK gets into 30% or larger house price falls.

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  • 396 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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