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Bara said..

Paddles B'mere said..
"There are no wins for the banks when property prices fall" .................... absolutely bang on, the banks definitely try to limit their exposure to bad debt. The last thing they want is to repossess an asset in a falling market.

However, I was reading somewhere the other day that the banks are actually in a bit of a lending frenzy trying to sell money quickly before regulation limits their activities. This seems to verify AUS1111's claim that Australians are servicing their debts quite well and the banks aren't too worried yet.

Theres a difference between what the banks want and what they get. Yes they would prefer business as usual with homeowners wallowing in maximum debt as property prices rise or even just stabilise after a circa 10 to 15% pull back. This gives them a nice earnings growth as interest margins widen on global rate rises and little negative equity to deal with.

BUT we arent the US and you cant easily walk on your debt by handing back the keys. The banks medium term still win even in a property collapse- they get housing stock that they gradually unwind ala the US banks post 2007, they get whatever other assets the defaulter has and they get a piece of their future earnings to boot. Much better deal than the US banks had.

So yeah some short term pain but into the next cycle they still win and in a leveraged way too. If/when we get the collapse the banks will be a far better buy by multiples than picking up the mortgagee in possession houses on offer. IMHO

The situation in the US is often way over stated. In most states in the USA, you cannot walk away from your house and hand back the keys.

But anyway... in a big housing crash the banks definitely lose, and so do we. If house prices drop more than 20%, that probably means the banks now have a very large number of loans on their books in negative equity. If people keep paying their loans... maybe not a big problem. When people can't pay their loans, and the bank finally steps in and takes the house... they have just made a big loss on that loan, because assuming they can sell it, they get less than the balance of the loan. Even if everybody keeps paying off heir mortgages... the bank's loan book looks really bad and risky. Their share price will drop. They may be forced by the regulators to increase capital. Oops...

In Ireland, the government pumped almost 100B euro into the banks for these reasons, nationalising some, and part nationalising others.

A big drop in house prices is actually very, very bad for the banks.

There are already stories in the press now where banks are actively forcing people with risky loans to go to other lenders. They are already trying to clear their books.

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Storm Ahead said..
Banks win because they will also go after your primary assets which includes your family home.

Put another way, Banks will try to get their money back at the expense of the investor. The investor is on the hook for the entire amount + all interest.

and if that doesn't work, then they will use our public tax dollars to bail them out....

It's a no risk situation for the big 4, hence why the gloves come off when the property market really heats up...and that is yet to come, if you study history anyway.

They then acquire all of these properties for next to nix, then slowly clear their book as the economy recovers. Some banks close, are bought out, etc etc

Don't ever feel sorry for banks....the big ones are playing a no lose game in the long term, which is the very reason the fundamentals of the global economy are so distorted and the rich/powerful are getting exceedingly rich...again...

Revolution, wars, blood on the streets, wealth re-distribution followed by eventual reallocation of wealth back to the rich/powerful again...rinse and repeat.

Human history summed up in a sentence.

ps...if you make conclusions based on what is in the "press" then you are a bigger fool than is apparent.

They control the damn press, the flow of information, always have, always will.

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eppo said..

It's a no risk situation for the big 4, hence why the gloves come off when the property market really heats up...and that is yet to come, if you study history anyway.

They then acquire all of these properties for next to nix, then slowly clear their book as the economy recovers. Some banks close, are bought out, etc etc

.

The banks don't have free money. There is always a cost to it.

If they hold housing stock when the market is bad and wait til it is good again, that is a huge holding cost. A huge one! They are in the market of lending money, not owning property, so its not a smart move for them and has a lot of risk. If they acquire a property for half of its previous loan value, they still have to pay someone for that interest or take that loss every month internally. When they go to sell, will they make that back? Very unlikely.

Its like that saying which I will paraphrase; 'If you owe the bank a million dollars, you have a problem. If you owe the bank a billion dollars, they have a problem'.

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nnnbrewery said..

Bara said..

Paddles B'mere said..
"There are no wins for the banks when property prices fall" .................... absolutely bang on, the banks definitely try to limit their exposure to bad debt. The last thing they want is to repossess an asset in a falling market.

However, I was reading somewhere the other day that the banks are actually in a bit of a lending frenzy trying to sell money quickly before regulation limits their activities. This seems to verify AUS1111's claim that Australians are servicing their debts quite well and the banks aren't too worried yet.

Theres a difference between what the banks want and what they get. Yes they would prefer business as usual with homeowners wallowing in maximum debt as property prices rise or even just stabilise after a circa 10 to 15% pull back. This gives them a nice earnings growth as interest margins widen on global rate rises and little negative equity to deal with.

BUT we arent the US and you cant easily walk on your debt by handing back the keys. The banks medium term still win even in a property collapse- they get housing stock that they gradually unwind ala the US banks post 2007, they get whatever other assets the defaulter has and they get a piece of their future earnings to boot. Much better deal than the US banks had.

So yeah some short term pain but into the next cycle they still win and in a leveraged way too. If/when we get the collapse the banks will be a far better buy by multiples than picking up the mortgagee in possession houses on offer. IMHO

The situation in the US is often way over stated. In most states in the USA, you cannot walk away from your house and hand back the keys.

But anyway... in a big housing crash the banks definitely lose, and so do we. If house prices drop more than 20%, that probably means the banks now have a very large number of loans on their books in negative equity. If people keep paying their loans... maybe not a big problem. When people can't pay their loans, and the bank finally steps in and takes the house... they have just made a big loss on that loan, because assuming they can sell it, they get less than the balance of the loan. Even if everybody keeps paying off heir mortgages... the bank's loan book looks really bad and risky. Their share price will drop. They may be forced by the regulators to increase capital. Oops...

In Ireland, the government pumped almost 100B euro into the banks for these reasons, nationalising some, and part nationalising others.


There are already stories in the press now where banks are actively forcing people with risky loans to go to other lenders. They are already trying to clear their books.

"A big drop in house prices is actually very, very bad for the banks."

short term yes. medium term no. just look at us banks with less recourse than here in oz. thats my point. buy that dip when it comes and make 300 or 400% ie way more than you can buying the firesale housing stock

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Bara said..

"A big drop in house prices is actually very, very bad for the banks."

short term yes. medium term no. just look at us banks with less recourse than here in oz. thats my point. buy that dip when it comes and make 300 or 400% ie way more than you can buying the firesale housing stock

If the fall is big enough, it means the bank is losing money, losing shareholder value, and probably getting rid of staff, closing down branches and "non core" businesses. The next level of destruction if it gets there, is part or full nationalisation (because the bank is "too big to fail"), or actually going bust. I can't see how any of these scenarios are good for the bank at all, even in the medium term.

On the other hand, it is of course possible You can make money from timing the market, IF you get it right and hold your nerve. That's kind of good for the bank I suppose, because you would be a happy shareholder, and they will be wanting those at the AGM, rather than the ones that lost all their money.

Exactly. If the falls are modest, largely less than the differential between equity mortgagees hold and the sale price, then in the case of foreclosure banks make money...simplez....eek

But no...."banks always lose money in a downturn blah blah"

Don't forget all of the banks dodgy loans are covered by some form of mortgage insurance. Either an insurance policy taken out by the borrower or a form of guarantee like a parents home or a family home. Any investment property or home purchased with less than 20% deposit needs either mortgage insurance or a guarantor. If a borrower has mortgage insurance and they default, the bank then sells the home for say 100k loss the bank just gets the 100k from mortgage insurance, the insurance company then goes after the borrower for the missing 100k, a sad and scary truth?? Bank suffers no real loss, other than a little extra admin work.

So yeah the big 4 won't loose and if they begin to loose the government will bail them out, just like Ireland.

We also must understand that there are a lot of additional costs incurred by an institution if they have to repossess and then onsell a property. These include legal/court costs, management costs, stamp duties, sale costs, cost of bad publicity. Institutions generally will outsource the repo/sale functions so there are the agency costs too. The reality is that unless the bank can see that they will easily make a good return on the sale of the property, they will avoid repossessing it at all costs and will be very averse to bad debt because it affects their cash flows.

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Krusty said..
Don't forget all of the banks dodgy loans are covered by some form of mortgage insurance. Either an insurance policy taken out by the borrower or a form of guarantee like a parents home or a family home. Any investment property or home purchased with less than 20% deposit needs either mortgage insurance or a guarantor. If a borrower has mortgage insurance and they default, the bank then sells the home for say 100k loss the bank just gets the 100k from mortgage insurance, the insurance company then goes after the borrower for the missing 100k, a sad and scary truth?? Bank suffers no real loss, other than a little extra admin work.

So yeah the big 4 won't loose and if they begin to loose the government will bail them out, just like Ireland.

I don't know the detail, but I thought that mortgage insurance really only covers the first bit of the mortgage, i.e. it covers the lender for the first 10 or 20% but after that it does nothing. I very much doubt it covers the entire mortgage, or the duration of the mortgage.

So, if that is the case, and I really don't know, the banks can't rely on that. If it was like that you would have the insurance companies running for the hills as the LVR goes south.

Your scenario you talk about is fine if its one house in a reasonable market, but if you think about lots of houses in a falling market, there is no win there from the mortgage insurance either.


Edit: I found something that suggests it covers the loan for the life of the loan, but I am still unsure. There was also this:

"If the proceeds from the sale of the property are insufficient to cover the outstanding loan balance and other costs incurred by your lender in relation to enforcing the mortgage, the lender is able to claim any shortfall from Genworth calculated in accordance with the terms of the insurance policy."

I wonder if the calculations pay out a substantial amount or trail off fast?

Any financial people able to offer input?

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FormulaNova said..

Krusty said..
Don't forget all of the banks dodgy loans are covered by some form of mortgage insurance. Either an insurance policy taken out by the borrower or a form of guarantee like a parents home or a family home. Any investment property or home purchased with less than 20% deposit needs either mortgage insurance or a guarantor. If a borrower has mortgage insurance and they default, the bank then sells the home for say 100k loss the bank just gets the 100k from mortgage insurance, the insurance company then goes after the borrower for the missing 100k, a sad and scary truth?? Bank suffers no real loss, other than a little extra admin work.

So yeah the big 4 won't loose and if they begin to loose the government will bail them out, just like Ireland.

I don't know the detail, but I thought that mortgage insurance really only covers the first bit of the mortgage, i.e. it covers the lender for the first 10 or 20% but after that it does nothing. I very much doubt it covers the entire mortgage, or the duration of the mortgage.

So, if that is the case, and I really don't know, the banks can't rely on that. If it was like that you would have the insurance companies running for the hills as the LVR goes south.

Your scenario you talk about is fine if its one house in a reasonable market, but if you think about lots of houses in a falling market, there is no win there from the mortgage insurance either.


Edit: I found something that suggests it covers the loan for the life of the loan, but I am still unsure. There was also this:

"If the proceeds from the sale of the property are insufficient to cover the outstanding loan balance and other costs incurred by your lender in relation to enforcing the mortgage, the lender is able to claim any shortfall from Genworth calculated in accordance with the terms of the insurance policy."

I wonder if the calculations pay out a substantial amount or trail off fast?

Any financial people able to offer input?

the lenders mortgage insurance does cover the full principal technically but in effect covers the shortfall on liquidation ie the negative equity. it is typically in place for only those loans with LVR of more than 80% so covers alot of the first stage meltdown for the banks and especially the interest only wall coming up for refinance. The practice was always to revalue in a rising market, drop your LVR and drop the insurance requirement asap. Would be interesting to know how many have managed to do that as now its too late.

Watch this space though since there will be a significant number of loans that fall back into this LVR threshold as the market falls and triggering more LMI requirements on existing loans that thought they had fallen outside it thus spreading the load or contagion if you like to more financially stable customers.

Also the insurers will be coming after the defaulters for the rest of their non bankrupt lives. Not pretty but like i said the banks will not be left holding the can medium term and will do very well out the other side of the cycle. But if they do somehow drop the ball (eg the insurers fail ala 2007) dont fret we the taxpayer will bail them out along with god knows what hair brained schemes the govt of the day will dream up to try and bail the mortgage holders out to boot.

end result all that debt gets shifted to us the taxpayer and the banks move on into the next cycle.

we're all in this together as the song goes

I fail to see how any of the scenarios being discussed are "good" for the bank in any way, shape or form, even in the medium term.

The banks are in the game to make a profit. House price reduction will reduce that.

The most profitable situation for the banks is for the ponzi scheme to continue. Ever more and larger loans, with people paying interest on these loans for 25-30 years.A 30 year home loan cut short after 5 years on repossession means the loss of a 25 year profit stream for that loan, assuming they at least get all their money back.

House price reductions may not be catastrophic for the bank (especially given the tax payers will bail them out when shtf), but I don't see how they can be "good".

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nnnbrewery said..
I fail to see how any of the scenarios being discussed are "good" for the bank in any way, shape or form, even in the medium term.

The banks are in the game to make a profit. House price reduction will reduce that.

The most profitable situation for the banks is for the ponzi scheme to continue. Ever more and larger loans, with people paying interest on these loans for 25-30 years.A 30 year home loan cut short after 5 years on repossession means the loss of a 25 year profit stream for that loan, assuming they at least get all their money back.

House price reductions may not be catastrophic for the bank (especially given the tax payers will bail them out when shtf), but I don't see how they can be "good".

in simple terms its "good" or if you like "less bad" for the banks because they have managed to extract billions in profits from an asymmetric risk profile ie they win big in the upswing, win bigger in a sustained upswing as we have had but dont really lose that much relatively on a pull back. Even an ugly one we all agree will be shifted to the taxpayer. so decades of profitable upside and limited insured and taxpayer backed downside is "good" for them especially when looked at past the bottom of this cycle which is obviously yet to come.

Yes the ponzi scheme is plan A but since that cant go on forever plan B aint so bad for them either. Compare it to the outcomes for the mortgage holders - win on plan A if you got in and out early enough but lose the lot on plan B and bankrupt your family plus have higher taxes to pay to bail out those same banks.

Ah... so by "good" you just mean that its much better (for them) than if we left "the market" to sort it out. Yep. Nice to have government backing for when you screwed up.

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nnnbrewery said..
Ah... so by "good" you just mean that its much better (for them) than if we left "the market" to sort it out. Yep. Nice to have government backing for when you screwed up.

nah not saying they screwed up at all - they just provide a service. No bank forced anyone to take out a loan. The poor jubs that bought into the ponzi scheme towards the top are the ones that screwed up. THE RBA can share the blame too for setting interest rates at "emergency levels" when here in oz at least there was no emergency. But if they hadnt we would have been above parity to the USD and damaged our exporters.

Still its going to be a hell of a price to pay to protect some exporters.

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Bara said..

nnnbrewery said..
Ah... so by "good" you just mean that its much better (for them) than if we left "the market" to sort it out. Yep. Nice to have government backing for when you screwed up.

nah not saying they screwed up at all - they just provide a service. No bank forced anyone to take out a loan. The poor jubs that bought into the ponzi scheme towards the top are the ones that screwed up. THE RBA can share the blame too for setting interest rates at "emergency levels" when here in oz at least there was no emergency. But if they hadnt we would have been above parity to the USD and damaged our exporters.

Still its going to be a hell of a price to pay to protect some exporters.

No bank forced anyone to take a loan. But they all used fraudulent methods to assess ability to pay, and thus offered larger loans than people will be able to pay when they move off interest only or when rates rise. The royal commission, even with its hobbled 1 yr time frame, has revealed as much.

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Bara said..
THE RBA can share the blame too for setting interest rates at "emergency levels" when here in oz at least there was no emergency.

How do you know that? The RBA are tasked with looking at the well-being of the economy, not just house prices. So, they juggle investment with other risk factors like housing bubbles.

Based on what they have done, I believe that they thought the economy was going to suffer for lack of investment if they increased interest rates.

You and I can guess what we think they should have done, but no doubt they looked at it in more detail.

Again, if we see good responses to demands of the economy, and they do a good job, how do you know if it was needed or not. Normally if the economy is overheating because of low interest rates we see high levels of inflation. I don't know what they are currently but given that it hasn't been in the news as an issue, it tells me its not that high.... hence the low interest rates were probably needed.

Its a shame that there was no other policy brought in earlier to cap the over-investment in housing.

The RBA set the overnight cash rate to suit an inflation target not to suit emergencies.

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Paddles B'mere said..
The RBA set the overnight cash rate to suit an inflation target not to suit emergencies.

and ive got a bridge to sell you then. read the minutes. they were concerned as much about the AUD as they cut rates as anything else. Also plenty of mention of slow economic growth and unemployment. They just hoped it wouldnt lead to a housing bubble but blind freddy could see that if they left them low enough for long enough it would.

No the days of single objective inflation targets for central banks went out the window after the gfc.

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nnnbrewery said..

Bara said..

nnnbrewery said..
Ah... so by "good" you just mean that its much better (for them) than if we left "the market" to sort it out. Yep. Nice to have government backing for when you screwed up.

nah not saying they screwed up at all - they just provide a service. No bank forced anyone to take out a loan. The poor jubs that bought into the ponzi scheme towards the top are the ones that screwed up. THE RBA can share the blame too for setting interest rates at "emergency levels" when here in oz at least there was no emergency. But if they hadnt we would have been above parity to the USD and damaged our exporters.

Still its going to be a hell of a price to pay to protect some exporters.

No bank forced anyone to take a loan. But they all used fraudulent methods to assess ability to pay, and thus offered larger loans than people will be able to pay when they move off interest only or when rates rise. The royal commission, even with its hobbled 1 yr time frame, has revealed as much.

and if you are told by a bank that you can borrow a million bucks on a $80,000 income you should actually do it?

I was offered $2m years ago but 5 minutes with a calculator made it pretty obvious $500k was a better idea.

this made me laugh this morning. i spose his predicament is his banks fault?

www.news.com.au/lifestyle/real-life/true-stories/cash-confessions-fatherofone-says-he-still-struggles-on-300k/news-story/2e2ef77daac0a47adb5f6d0a281bce60

The RBA were between a rock and a hard place on the exchange rate/inflation/ bubble conundrum. There was no right answer, even though the bubble risk was obvious.

As for the banks gaining in a crash
- Before any bail out, the banks shareholders have been wiped out. That's no gain.
- The banks are limited in their ability to retained defaulted properties because of, not just the direct holding costs, but also the higher capital requirements of that type of asset.

While the punch bowl was kept topped up (RBA and lose Government policy), Banks lending criteria were relaxed. A cleaner could go out and buy 5 or 6 houses....

- APRA the regulatory body, were asleep on a decades long hiatus. Turning a blind eye to the problem and on occasion sending a letter to their mates at the banks telling them to 'cool it a bit'.
The revolving door at the RBA and APRA kept the Dream of securing nice juicy board positions in big banks alive.
They were too close to the banks as the Royal Commission has stated.

- Governments, both Federal and State loved all of this as all this lending stimulated the economy, they sat back and made a motza on Stamp Duty and watched the economy grow (on borrowed money).

- The Royal Commission was hard fought as Turnbull and Morrison opposed this for a very long time. Now the truth is finally coming out.

Will anyone go to Jail? NOoooooo!

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Bara said.
and if you are told by a bank that you can borrow a million bucks on a $80,000 income you should actually do it?

I was offered $2m years ago but 5 minutes with a calculator made it pretty obvious $500k was a better idea.

this made me laugh this morning. i spose his predicament is his banks fault?

www.news.com.au/lifestyle/real-life/true-stories/cash-confessions-fatherofone-says-he-still-struggles-on-300k/news-story/2e2ef77daac0a47adb5f6d0a281bce60

Well... there is this concept called "responsible lending". Just because a borrower is willing to enter into a loan they can't afford doesn't mean the bank should offer it.

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nnnbrewery said..

Bara said.
and if you are told by a bank that you can borrow a million bucks on a $80,000 income you should actually do it?

I was offered $2m years ago but 5 minutes with a calculator made it pretty obvious $500k was a better idea.

this made me laugh this morning. i spose his predicament is his banks fault?

www.news.com.au/lifestyle/real-life/true-stories/cash-confessions-fatherofone-says-he-still-struggles-on-300k/news-story/2e2ef77daac0a47adb5f6d0a281bce60

Well... there is this concept called "responsible lending". Just because a borrower is willing to enter into a loan they can't afford doesn't mean the bank should offer it.

i guess im old fashioned then. im into responsible borrowing. but yeah lets blame someone else for your own decisions

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Bara said..

nnnbrewery said..

Bara said.
and if you are told by a bank that you can borrow a million bucks on a $80,000 income you should actually do it?

I was offered $2m years ago but 5 minutes with a calculator made it pretty obvious $500k was a better idea.

this made me laugh this morning. i spose his predicament is his banks fault?

www.news.com.au/lifestyle/real-life/true-stories/cash-confessions-fatherofone-says-he-still-struggles-on-300k/news-story/2e2ef77daac0a47adb5f6d0a281bce60

Well... there is this concept called "responsible lending". Just because a borrower is willing to enter into a loan they can't afford doesn't mean the bank should offer it.

i guess im old fashioned then. im into responsible borrowing. but yeah lets blame someone else for your own decisions

I'm not in such a situation. I'm a conservative borrower and in no danger even if there are massive drops. Sure, borrowers should do their homework, but does that really let the bank off the hook for doling out loans where it's clearly unaffordable for the borrower?

I'd reverse what you said. I'm old fashioned... I'm into responsible lending. but yeah, let's blame the borrowers for agreeing to take on "liar loans" from the bank.

The banking sector and its regulatory bodies are supposedly highly educated on financial instruments etc.

so the majority of poor Shmucks who has t the foggiest regarding financial risk analysis assessment is to bear the brunt of all of this.

Is that what we've come to ?

Nothing will change though. Same thing is going to happen like clockwork but most of you wouldn't have the foggiest why or when.

I suggest you find out.

Another spring Qld auction clears only 24% right up to the final hour. Was there a footy match on or something?

News is reporting the downturn, so buyers aren't that keen anymore, making the downturn even worse. The news writes itself.

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evlPanda said..
News is reporting the downturn, so buyers aren't that keen anymore, making the downturn even worse. The news writes itself.

Well a bit off topic but a well known south brizzy car dealership sold only 12 new xars for the month usually 60 .. share market jitters or what

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bazz61 said..

evlPanda said..
News is reporting the downturn, so buyers aren't that keen anymore, making the downturn even worse. The news writes itself.

Well a bit off topic but a well known south brizzy car dealership sold only 12 new xars for the month usually 60 .. share market jitters or what

Home equity loans drying up I'd say.

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bazz61 said..

evlPanda said..
News is reporting the downturn, so buyers aren't that keen anymore, making the downturn even worse. The news writes itself.

Well a bit off topic but a well known south brizzy car dealership sold only 12 new xars for the month usually 60 .. share market jitters or what

Home equity loans drying up I'd say.