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Margin Calls


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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.

wrong

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

So the money was taken out of the banks safe and delivered to the borrow ?? :unsure:

The bank may have lost extra interest payements but they have not lost anything physically.

Yes they are obiliged to balance the books within legal criteria. That is until the clever banker can get that criteria changed.

I refer to point 4.

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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I'ts simple really.

Lenders lend money, they need capital or cash to do this.

Normal 80% LTV Mortages are considered half the normal risk, you need half the capital/equity to lend the same amount of money out.

You start of with 100K house, and 80% LTV

House prices fall 10%, now it's a 90% LTV.

You need double the equity to cover the risk.

So lenders have been dumping the high risk people, restricting mortgages etc.

Margin calls will not involve the person living in the house, the investors will want to

see the lender removing the high risks, and making an honest prediction of future risks.

So you get asked to remortgage, given cash payments to leave, and margin calls where the sale price

will cover the mortgage, removing that risk.

(Basel II is working from about 2008 for these mortgages or assumed from May 2008, FSA.gov.uk advise 80% as a LTV for 50% cut in risk requirements,

% may not add up should be 8% - 4% )

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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.

The bank has sold on the loan to a third party, but it still gets to keep all of the interest and and keeps the house when the loan defaults? Does not compute...

(And let's not even get started on all that 'the bank creates the money' cobblers...)

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Where is paddles??

Unable to get away with spending any time on HPC during the working day....

I know nothing about margin calls; I predicted that we'd see them on BTL mortgages by the end of July, and I haven't seen any articles in the Daily Diana (and they'd be the first to report them) so I guess I was wrong.

Are they possible legally - Yup; either via specific clauses or with reference to the LTV in the offer letter being part of the agreement.

Will they happen - Probably; the Prisoner's Dilemma rewards uncooperative play. http://en.wikipedia.org/wiki/Prisoner's_dilemma

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

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).

Let's hope for a 'milf price crash' then

;)

Edited by Saving For a Space Ship
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The bank has sold on the loan to a third party, but it still gets to keep all of the interest and and keeps the house when the loan defaults? Does not compute...

(And let's not even get started on all that 'the bank creates the money' cobblers...)

I can here the "money creation" loonies warming up their keyboards now. The money banks lend out is either capital deposited by savers, profit from previous transactions, money borrowed from other banks, or the results of the sale of assets such as CDO/MBS.

Banks don't want houses. houses are of no use to them. In fact, the mortgage/loan contract requires the bank to sell the house immediately upon reposession.

It is a common mistake to believe the bank has complete discretion in relation to reposession, margin calls etc... in fact they have none at all. In the event of reposession or margin calls being due, the bank will follow strict rules as per the contracts.

If the bank does not follow the rules to the letter, one of 3 things could happen.

1) The organisation insuring the debt could refuse to pay out as the bank had not followed the terms of the insurance.

2) The organisation the bank sold the loan onto could force the bank to buy it back as the bank had not followed the terms of the loan/sale.

3) The debtor could force the bank to write off any negative equity.

So the bank will basically do whatever gets them the most money back.

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1) Liquidate all financial assets, assets held on margin and bank accounts of any kind in any currency, any bank, anywhere.

2) Put at least a quarter of the proceedings in bullion, either in your immediate physical possession or in allocated, segregated and insured storage in a safe jurisdiction (the UK is not safe for this purpose, nor is any service provided by UK or US companies)

3) Put the rest in German or Swiss short term government securities expiring in no longer than 6 months, preferably less. Example ISIN DE0001141430 or CH0008435551. If you speak some German or know someone who can translate for you, it is possible, easy and preferable to hold German treasury paper directly. See http://www.deutsche-finanzagentur.de and http://www.tagesanleihe.de

4) Only keep the bare minimum in GBP or USD and don't keep it in a bank.

5) Keep your passport, a dozen or two gold sovereigns and the cash you would need to get out of the UK at hand.

6) Pray

- cgnao

http://www.greenenergyinvestors.com/index.php?showtopic=3813

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I can here the "money creation" loonies warming up their keyboards now.

Yes sorry I forgot - money supply never increases at all does it :P

The money banks lend out is either capital deposited by savers, profit from previous transactions, money borrowed from other banks, or the results of the sale of assets such as CDO/MBS.

Are you denying the existance of fractional reserve lending?

Banks don't want houses. houses are of no use to them.

Yes they do because they can sell them for money

In fact, the mortgage/loan contract requires the bank to sell the house immediately upon reposession.

Well there you go then

So the bank will basically do whatever gets them the most money back.

Something we agree on.

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Yes sorry I forgot - money supply never increases at all does it :P

Yes it does, central bans issue more money in the terms of loans to banks.

Are you denying the existance of fractional reserve lending?

No fractional reservse mean if bank a has for example £100 in deposits it can only lend of £99.

Yes I understand the money may be re-deposited and re-lent out many times, it's still the same cash just going around and around.... deposits/borrowings/etc.... i.e. what the bank owes {depositors/other banks} will still exceed the amount the bank has lent out.

Yes they do because they can sell them for money

Me thinks you've mssed the point. Banks don't want houses they want money. They only repossess houses so they can sell them and get the money. Houses for banks are bad news...they are illiquid assets. Banks don't want to be landlords.

OK, can all the money creation loonies go away again now, you're opinions are not relevant to this thread which is about margin calls.

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No, fractional reserves mean if bank a has for example £100 in deposits it can only lend £99.

Not what I understand, they lend based on having Tiers of equity they can leverage.

So with a 10% basis of risk a residential mortgage would be counted as half that, or 5% normally. (0.5% for Automated Valuation Models)

The lender has to have readily available Tier 1 capital like cash or deposits.

100K mortgage needs 5K in Tier 1 , Tier 2 & 3 can be used to cover based on risk models.

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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.

I posted a little while ago that a very close friend since teenage years works for a national resi and commercial lender.

For BTL, "margin calls" will happen at the time they try to get a different mortgage deal. Margin calls do happen with commercial loans (in the truest sense of the phrase) but are unlikely to happen with BTLers. It would cause mass panic if it spread among different institutions and cause catastrophic asset writedowns (which would spread to resi mortgages quickly) they are not currently willing to admit to.

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snip

Me thinks you've mssed the point. Banks don't want houses they want money. They only repossess houses so they can sell them and get the money. Houses for banks are bad news...they are illiquid assets. Banks don't want to be landlords.

OK, can all the money creation loonies go away again now, you're opinions are not relevant to this thread which is about margin calls.

A bank cant be a landlord on a possessed property, UNLESS they BUY it.

AT Possession, it still belongs to the owner. The Bank merely sells it to try to balance the LIABILITY on its books.

If the bank wanted to be the landlord, they would need to finance the deal themselves... a double whammy for them.

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Yes it does, central bans issue more money in the terms of loans to banks.

No fractional reservse mean if bank a has for example £100 in deposits it can only lend of £99.

Yes I understand the money may be re-deposited and re-lent out many times, it's still the same cash just going around and around.... deposits/borrowings/etc.... i.e. what the bank owes {depositors/other banks} will still exceed the amount the bank has lent out.

Me thinks you've mssed the point. Banks don't want houses they want money. They only repossess houses so they can sell them and get the money. Houses for banks are bad news...they are illiquid assets. Banks don't want to be landlords.

OK, can all the money creation loonies go away again now, you're opinions are not relevant to this thread which is about margin calls.

Fractional reserve isn't what modern banks use, they use Capital Asset Ratios, which say that if they have 100 in capital assets, they can carry 1000 in loans (for example).

before you get too dismissive, you might want to bone up a little.

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