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r thritis

Margin Calls

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This topic seems to be gaining some mainstream legs. As I understand it, if a mortgage is offered on, say, a 85% LTV basis, and the value of the property falls, the lender is able to re-establish the agreed LTV by requesting a lump-sum payment from the mortgagee.

Questions:

1. Is this a standard clause in all mortgage agreements - or is it primarily a BTL thing?

2. Did we see any margin calls in the 89-94 crash?

3. Has this happened in the US?

I can see that there is potential for an absolute meltdown here - if one lender made a margin call, all others would scramble to follow suit to avoid being left behind. The prospect of huge (10k+) bills landing on the mats of already stretched home-owners and BTL investors would cause absolute panic and a massive wave of bankrupcies and reposessions (to the extent that the govt would surely intervene). Utimately, this would be in no-one's best interest, least of all the lenders.

It couldn't happen - could it?

RT.

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I've got a BTL mortgage, but there's no mention of margin calls in the small print (I don't know if I have any tiny print though).

I don't personally think it would happen directly, especially if you're up to date with your repayments. However, if you wanted to remortgage with a different lender you might have to maintain a certain LTV if they revalue the property.

BTL lenders IMHO are mostly interested in ensuring the rent is ~125% of the mortgage interest.

I'd very much doubt margin calls would happen on standard residential mortgages.

I suppose it might happen to people with large portfolios of properties arranged through a single lender - but again I'm not sure if margin calls happen in the commercial property world.

Given we taxpayers have effectively bailed out the banks, I think there would be uproar if they started repossessing properties on a massive scale :o .

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This topic seems to be gaining some mainstream legs. As I understand it, if a mortgage is offered on, say, a 85% LTV basis, and the value of the property falls, the lender is able to re-establish the agreed LTV by requesting a lump-sum payment from the mortgagee.

Questions:

1. Is this a standard clause in all mortgage agreements - or is it primarily a BTL thing?

2. Did we see any margin calls in the 89-94 crash?

3. Has this happened in the US?

I can see that there is potential for an absolute meltdown here - if one lender made a margin call, all others would scramble to follow suit to avoid being left behind. The prospect of huge (10k+) bills landing on the mats of already stretched home-owners and BTL investors would cause absolute panic and a massive wave of bankrupcies and reposessions (to the extent that the govt would surely intervene). Utimately, this would be in no-one's best interest, least of all the lenders.

It couldn't happen - could it?

RT.

Most BTL mortgages have it written into the contract. there is a thread on here ( Ny paddles If I remember ) with examples. BTL mortgages are Business loans so the banks want you to hold the risk.

Personnal mortgages appear not to have a claus.

Has it happened ???? - not yet in housing but it happened in stock in the 1920's and you know how that ended up.

Will it happen ???? - Who do you think is going to hold the risk, the BTL chav landlord or the bank :lol:

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Most BTL mortgages have it written into the contract. there is a thread on here ( Ny paddles If I remember ) with examples. BTL mortgages are Business loans so the banks want you to hold the risk.

Personnal mortgages appear not to have a claus.

I've just checked my A&L stuff. No mention of margin calls. Lots of info about early repayment charges or charges if you pay off more than the allowed 10% within the early repayment period.

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From the above thread.......................................

I have in front of me the Standard BTL Offer Conditions 2006 from the Mortgage Works.

Section 12 reads

" Before we make the offer we have a valuation of the property carried out. At the time we make the offer the amount of the loan can be expressed as a percentage of the value specified in the valuation(LTV). If at any time subsequently the LTV rises to a higher percentage than it was at the time the offer was made, we reserve the right to ask you to prepay the part of the loan which will re-establish the LTV to at least the same percentage it was when the offer was made

Yes it can happen and probably will

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So it's clear that it can happen, but will it?

Look at from the bank's point of view. They are desperate for cash to shore up their balance sheets. I could envisage a situation where they put pressure on landlords to pay margin and many will with the bank breathing down their neck. Many BTLers are brass-necked enough to ignore it and call the banks bluff but the majority are otherwise well-behaved middle class citizens who will sh*t a brick and pull out all the stops to keep the bank happy. Who knows, that may even mean that they remortgage against a wholly-owned family home to meet the margin.

So, given the financial mess the banks are in and the demographic of the BTLers (older, other wealth stashed away) I think it is probably inevitable that they will ask for margin. Bear in mind that they don't need to repossess everyone who can't pay margin. If they bust a few asses then it will be enough to "encourager les autres" to do the necessary and come up with the cash: there will be a lot of BMW X5s and Range Rovers on the market, maybe even a few MILFs on the game (they will probably not get much business as they will naturally price themselves 30% above the going rate).

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From the above thread.......................................

I have in front of me the Standard BTL Offer Conditions 2006 from the Mortgage Works.

Section 12 reads

" Before we make the offer we have a valuation of the property carried out. At the time we make the offer the amount of the loan can be expressed as a percentage of the value specified in the valuation(LTV). If at any time subsequently the LTV rises to a higher percentage than it was at the time the offer was made, we reserve the right to ask you to prepay the part of the loan which will re-establish the LTV to at least the same percentage it was when the offer was made

Yes it can happen and probably will

Thanks marmite. That thread says it all really. From what I see there, it looks like its a condition of many BTL mortgages, but not residential mortgages (unless I missed something). I would still condsider it unlikely that they would invoke it though if someone was meeting their monthly payments. To do so would quickly turn a profit returning customer into a distressed default. Yes - they have already done it for overseas holiday property - but it is a big step from that to mainstream BTL.

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So it's clear that it can happen, but will it?

Look at from the bank's point of view. They are desperate for cash to shore up their balance sheets. I could envisage a situation where they put pressure on landlords to pay margin and many will with the bank breathing down their neck. Many BTLers are brass-necked enough to ignore it and call the banks bluff but the majority are otherwise well-behaved middle class citizens who will sh*t a brick and pull out all the stops to keep the bank happy. Who knows, that may even mean that they remortgage against a wholly-owned family home to meet the margin.

So, given the financial mess the banks are in and the demographic of the BTLers (older, other wealth stashed away) I think it is probably inevitable that they will ask for margin. Bear in mind that they don't need to repossess everyone who can't pay margin. If they bust a few asses then it will be enough to "encourager les autres" to do the necessary and come up with the cash: there will be a lot of BMW X5s and Range Rovers on the market, maybe even a few MILFs on the game (they will probably not get much business as they will naturally price themselves 30% above the going rate).

Are all the banks desperate for cash to shore up their balance sheets ???

Maybe the Goldmans of this world will see this as a oppertunity to acumulate their rivals at a disscount ???

This is exactly what happened in the 1920's

The middle class farmers where not given the chance to just ignore the margin calls / loan recalls. Either pay up or loose everything. Bank gains interest paid over X years and asset, ok balance sheet looks a bit off for a while but a strike of the pen gets rid of that.

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In situations where banks can make margin call they will. They are a business after all... not a charity. Too many people think that banks "wouldn't do that" because there would be uproar. Banks don't care. They can do whatever it says in the contract, and they will in order ot make the best return for their investors.

that said, I don't expect to see many immediate reposessions... if people can't meet the calls the bank will simply move them to an interest rate which reflects the LTV.

This isn't because the banks are nice people, it's because they want to screw as much money as possible out of the BTLers. A watershed will eventually be reached, probably about 6 months after margin calls start, where banks realise they need to reposess and auction the properties as quickly as possible in order to recover their money.

Meanwhile, those who got forced into higher rates will be finding the payments unaffordable.

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... Maybe the Goldmans of this world will see this as a oppertunity to acumulate their rivals at a disscount ???

This is exactly what happened in the 1920's

The middle class farmers where not given the chance to just ignore the margin calls / loan recalls. Either pay up or loose everything. Bank gains interest paid over X years and asset, ok balance sheet looks a bit off for a while but a strike of the pen gets rid of that.

"If the American people ever allow private banks

to control the issue of their money,

first by inflation and then by deflation,

the banks and corporations that will

grow up around them (around the banks),

will deprive the people of their property

until their children will wake up homeless

on the continent their fathers conquered."

Thomas Jefferson, (1743-1826), US Founding Father, drafted the Declaration of Independence, 3rd US President

Source: in 1802 in a letter to then Secretary of the Treasury, Albert Gallatin

(My apologies to the poster who has this quote in their permanent sig.)

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margin calls are unlikely while SVR trap is very likely

you bought a 250k house 1 year ago with a 2yr fixed deal and 10% deposit. next year you come out of your fixed rate mortgage to find the house is worth 200k and your mortgage 225k. you cant re-mortgage unless you can bring that LTV down to 90% (perhaps 90% mortgages will be gone by then too). to bring it to 90% you would need to find £45k under the sofa which most people cant do.

so you will find you go from 5% to 7.5% SVR and no way to re-mortgage down from that 7.5%.

if you cant afford the SVR then you will be bankrupt and lose the house + anything else the bank can claw back.

This is all with a modest 20% fall from when you bought (we have had 10% so only 10% more!)

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This isn't because the banks are nice people, it's because they want to screw as much money as possible out of the BTLers. A watershed will eventually be reached, probably about 6 months after margin calls start, where banks realise they need to reposess and auction the properties as quickly as possible in order to recover their money.

That's a good point, when there is a downturn the banks don't act in concert to try to control the situation, they act selfishly to protect their own interests. If it clear there will be a downturn (which it is) then the old adage "if you're going to panic, panic early" comes into play. The banks who go in hard and fast and sell properties first will do best, those who dither will effectively chase the market down and end up repossessing when the market is flooded and prices at their lowest.

So in summary, expect bloodshed.

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In situations where banks can make margin call they will. They are a business after all... not a charity. Too many people think that banks "wouldn't do that" because there would be uproar. Banks don't care. They can do whatever it says in the contract, and they will in order ot make the best return for their investors.

that said, I don't expect to see many immediate reposessions... if people can't meet the calls the bank will simply move them to an interest rate which reflects the LTV.

This isn't because the banks are nice people, it's because they want to screw as much money as possible out of the BTLers. A watershed will eventually be reached, probably about 6 months after margin calls start, where banks realise they need to reposess and auction the properties as quickly as possible in order to recover their money.

Meanwhile, those who got forced into higher rates will be finding the payments unaffordable.

Agree that banks will do anything in their own interest to maximize profit - but for that very reason - why would they turn a mortgagee who was meeting their monthly commitments into a default? The bank would end up writing off the loss after reposession etc and the mortgagee would be bankrupt. No win for all parties.

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This topic seems to be gaining some mainstream legs. As I understand it, if a mortgage is offered on, say, a 85% LTV basis, and the value of the property falls, the lender is able to re-establish the agreed LTV by requesting a lump-sum payment from the mortgagee.

Questions:

1. Is this a standard clause in all mortgage agreements - or is it primarily a BTL thing?

2. Did we see any margin calls in the 89-94 crash?

3. Has this happened in the US?

I can see that there is potential for an absolute meltdown here - if one lender made a margin call, all others would scramble to follow suit to avoid being left behind. The prospect of huge (10k+) bills landing on the mats of already stretched home-owners and BTL investors would cause absolute panic and a massive wave of bankrupcies and reposessions (to the extent that the govt would surely intervene). Utimately, this would be in no-one's best interest, least of all the lenders.

It couldn't happen - could it?

RT.

Im no expert on Margin Calls, but I would assume that an "effective" marginal call would arrive when the BTL'er comes to re-mortgage.

Either put down further capital to make up the LTV, or go onto the SVR.

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Agree that banks will do anything in their own interest to maximize profit - but for that very reason - why would they turn a mortgagee who was meeting their monthly commitments into a default? The bank would end up writing off the loss after reposession etc and the mortgagee would be bankrupt. No win for all parties.

But if you cajole and bully then maybe 50-60% will cough up the margin without having to repossess. And if you repossess a few and word gets around the BTL community many people will find the money. It's the same reason that loan sharks usually get paid - if people know they will get their legs broken they tend to make a little more effort to find the money.

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Agree that banks will do anything in their own interest to maximize profit - but for that very reason - why would they turn a mortgagee who was meeting their monthly commitments into a default? The bank would end up writing off the loss after reposession etc and the mortgagee would be bankrupt. No win for all parties.

It's all a giant version of Prisoners Dilema / game theory.

When one breaks rank and imposes margin calls, the others will follow.

It's normally a "leader follower" model. So watch what the big players do. The rest will typically follow suit (unless they are really in trouble).

It's more compex than that, but hopefully you get the idea.

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Im no expert on Margin Calls, but I would assume that an "effective" marginal call would arrive when the BTL'er comes to re-mortgage.

Either put down further capital to make up the LTV, or go onto the SVR.

That makes sense.

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But if you cajole and bully then maybe 50-60% will cough up the margin without having to repossess. And if you repossess a few and word gets around the BTL community many people will find the money. It's the same reason that loan sharks usually get paid - if people know they will get their legs broken they tend to make a little more effort to find the money.

Borrow on the credit card to pay the margin call? nice

How is your average jo (and remember most small time BTLers are the average jo) going to find £20-40-60-80k ??

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Agree that banks will do anything in their own interest to maximize profit - but for that very reason - why would they turn a mortgagee who was meeting their monthly commitments into a default? The bank would end up writing off the loss after reposession etc and the mortgagee would be bankrupt. No win for all parties.

The banks always look at risk, this is why the LTV exists.

Just because you paid your repayement this month, who is to say you will pay next month or the month after.

The bank loses nothing in a default. The money was created against an asset. The bank has been paid interest for X months and now own the asset. The original loan was just an entry on the balance sheet and most probably packaged up and sold off to a rival bank.

So bank gains

1. The asset

2. The interest payements for all the months / years up to default

3. The fees and price agreed of repackaging the debt and selling to someone else

4. leverage over other not so clever bankers that have not looked at the end game. This will end in more control and power for the clever banker.

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Im no expert on Margin Calls, but I would assume that an "effective" marginal call would arrive when the BTL'er comes to re-mortgage.

Either put down further capital to make up the LTV, or go onto the SVR.

Agree entirely - and doing it this way (which is happening now), avoids the 'nuclear' option of sending out large bills.

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The mere fact that the BTL docs contain a provision for margin calls make's me think that banks would be prepared to use them.

Also, how many BTL mortgages have been securitised? I'd guess that the securitisation documentation will be pretty clear about whether the margin call is needed or not.........the decision may not be in the original lenders hands?

edit: typos

Edited by Dunroamin'

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The bank loses nothing in a default.

Disagree - if the value of the asset is less than the amount borrowed, the bank has lost.

Edited by r thritis

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  • 395 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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