Monday, June 25, 2007

Negative equity

Creeping beast stalks homeowners

The grim spectre of negative equity is rearing its ugly head again as thousands of borrowers take out new, bigger loans... In part, the trend is being driven by leading lenders luring first-time buyers with offers of loans worth anything from 100 to 125% of the price of a house.

Posted by tinecu @ 11:24 AM (560 views)
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10 thoughts on “Negative equity

  • dohousescrashinthewoods says:

    Slightly clever coverage as this is “voluntary” negative equity.
    I wonder if it can be used to hide “real” negative equity which must just be starting now?

    Reply
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  • looks like a duck, sounds like a duck… it is “negative equity”

    this creeping negative equity may be cunningly sold by lenders as 100%-125% loans, but it is really sign that lending possibilities (125% equity and interest only loans) have maxed out. so I do not see where these stupid buyers can envision price appreciation coming from in the future!?

    best quote in the article “Gamble sometimes pays off”… it s a gamble, these buyers are destitutes that are taking a punt on their lives, courtesy of reckless lending. All ponzi schemes are destined to fall in the end.

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  • Its borrowers are not typically in arrears when they apply, says Dallimore. They are middle-class earners whose spending habits have left them with debts that now ‘cramp their style’.

    What ‘style’ is this then ? The ‘style’ of doing nothing more with their lives than buying the latest consumer driven keeping-up-with-the-joneses tat that the high street pushes at them ?

    Hmmm. Picture loans. Aren’t they the ones with the advert where the woman hasn’t worked out how much she wants to borrow before she phones up and then says ‘£25,000’ just like that ?

    ‘Dallimore admits that today, negative equity appears to be viewed differently.’ It may be viewed differently today, but the pain will be just the same when it gets experienced tomorrow.

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  • Why should the banks care? They shunt off all the risk on to unsuspecting pension funds and hedge funds! Indeed, these days, most of the hedge fund money is coming from pension funds. Why? Because the pension funds have not been able to match the performance of the hedge funds. It’s a case of: “if ya can’t beat ’em, join ’em”! How have hedge funds managed to perform so phenomenally well? A combination of huge risks and smoke-n-mirrors accounting. Some hedge funds have spectacularly blown up. The remainder have managed to stay afloat long enough to pass the risk on to the pension funds. So, who is holding the risk now? Pension fund beneficiaries, i.e. you and me.

    I must admit – I am gutted at what these [email protected]@rds have done to my finances, but I marvel at the ingenuity of it!

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  • Uncle Fargas says:

    “‘We are not encouraging borrowers to spend more or borrow more,’ she says. ‘By the time they have come to us, the money has already been spent. We simply make the debt easier to afford.'”

    Yes, but then they can start using their credit cards again can’t they. If they were irrsponsible before, why are they suddenly going to be responsible now.

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  • Royston – why dont you read about how hedge funds work, the accounting principles and valuation models. Then you will see that your comments are utter nonsense.

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  • george monsoon says:

    Please can someone explain exactly what a Hedge fund is? My privot is looking a bit knackered, so I could use a new hedge.

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  • GM,

    A hedge fund is an investment vehicle which can ‘go long’ and ‘go short’. This means that it can hold stocks that it thinks will go up, and it can sell stocks (that it doesn’t own) that it thinks will go down. How can it sell stocks it doesn’t own. It borrows them from pension funds who hold them. For this borrowing, the hedge fund pays the pension funds a small fee and the hedge fund must also put up collateral – often in the form of shares that it thinks will go up. Hedge funds are less closely scrutinised than conventional mutual funds. They normally provide annual reports. They often declare (‘self-certified’) monthly returns. However, they vigorously argue against revealing their actual holdings on the grounds that if other traders know what they hold, these other traders could try to manipulate price to weaken the fund’s viability. This is because positions are often highly leveraged or use derivatives, where big price moves require the fund to hedge by putting up more cash. The flipside of this secrecy is that nobody really knows the risk that the hedge fund is really taking until it blows up – e.g. Amaranth Advisors.

    Care to add anything to this explanation, Hedger?

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  • Hedger – it is no coincidence that hedge funds operate out of tax havens such as Guernsey where their actual dealings can be hidden. I know what they CLAIM to do, i.e. hedge out the risk, but this is complete bull. If anything their secrecy means that no-one can estimate the extent to which certain hedges are leveraged. Very bad. And as yet, completely untested.

    PS – I work in the finance industry in Guernsey. Hence the username

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  • I’ve learned about Hedge funds today. Hedger, any come-back or are Royston and Inbreda correct?

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