Proposed mortgage cap 'suicidal' say 'property experts'

chewmylegoff

Really2 wrote: »

Don't bother kenny if he could not see why banks have to do this you are never going to make him.

I presume he thinks all the write-downs so far have been done for a laugh or have all been caused by repos.:rolleyes:

the write downs so far are due to exposure to securities where they thought the default rate was going to be 0.05%, but turned out to be much much more, because the loans on which the security were constructed were not what they were lead to believe by the rating agencies. leverage magnified that exposure. incorrect valuation models further magnified the exposure.

derivatives based on subprime packaged as prime are not what we are talking about here. we are in the realms of retail banking, not investment banking.

i'm happy for you both to give up though, as neither of you seems to understand (a) how bad debt provisions work; (b) the concept that you have to repay the loan and not the market value of the house; and (c) how many zeros there are in a trillion.

Really2

dopester wrote: »

Not if the buyer is still able to afford their payment obligations on the mortgage.

Yes, they would most likely see the value of their homes/"investment" crash.

And aren't something like 45% of homes in this country owned outright? Yes the values would fall, but it would allow fresh opportunity for people waiting to buy and younger generations to come in and buy at lower levels, without crazy debt burdens.

Then better positioned to start things moving again... I mean the economy, new business startups and new innovation that we need in this country - not the slavery of HPI and servicing big mortgage debt.

Sorry dopester the value of the house effects the market value of the loan not the fact people can still repay.

If most loans were -130% - 150% no one would want to buy them in reality.

Really2

chewmylegoff wrote: »

the write downs so far are due to exposure to securities where they thought the default rate was going to be 0.05%, but turned out to be much much more, because the loans on which the security were constructed were not what they were lead to believe by the rating agencies. leverage magnified that exposure. incorrect valuation models further magnified the exposure.

derivatives based on subprime packaged as prime are not what we are talking about here. we are in the realms of retail banking, not investment banking.

i'm happy for you both to give up though, as neither of you seems to understand (a) how bad debt provisions work; (b) the concept that you have to repay the loan and not the market value of the house; and (c) how many zeros there are in a trillion.

a)I am a qualified accountant but write downs in banking terms are not bad debt provision they are a write down of asset value.
b)Irelevent on the market value of a loan
c) 12 in a uk trillion.

dopester

Really2 wrote: »

Sorry dopester the value of the house effects the market value of the loan not the fact people can still repay.

If most loans were -130% - 150% no one would want to buy them in reality.

You are right as I understand it (as if you wanted to sell the loan book on it might have a lot less value) - but then I think Chewy is also right.

chewmylegoff

Really2 wrote: »

a)I am a qualified accountant but write downs in banking terms are not bad debt provision they are a write down of asset value.
b)Irelevent on the market value of a loan
c) 12 in a uk trillion.

write-downs on trading assets are not the same as bad debt provision, but i didn't think we were talking about write-downs on mortgage backed securities here.

i may be mistaken, but i'm pretty sure we are taking about the carrying value of a mortgage book in the accounts of a retail bank.

mortgage loans are carried at book value, less a bad debt provision. loans are not carried at market value in a bank's accounts, unless they are moved into a bank's trading book.

Really2

dopester wrote: »

You are right as I understand it (as if you wanted to sell the loan book on it might have a lot less value) - but then I think Chewy is also right.

I agree if it was only down to defaults it could possibly work its way out like chewy said but unfortunatly the banks would have to do the write-downs by law.

So it would be by by banks.

Really2

chewmylegoff wrote: »

write-downs on trading assets are not the same as bad debt provision, but i didn't think we were talking about write-downs on mortgage backed securities here.

i may be mistaken, but i'm pretty sure we are taking about the carrying value of a mortgage book in the accounts of a retail bank.

mortgage loans are carried at book value, less a bad debt provision. loans are not carried at market value in a bank's accounts, unless they are moved into a bank's trading book.

I think it is irrelevant the type it still as to be shown at market value.

If a bank had to sell its assets to raise funds they could only sell at market value.
If they did not their balance sheet would be a blatant lie.

If the loans come good again great but why do you think banks are dumping toxic assets and paying for the privilege.

chewmylegoff

Really2 wrote: »

I agree if it was only down to defaults it could possibly work its way out like chewy said but unfortunatly the banks would have to do the write-downs by law.

So it would be by by banks.

what law requires banks to write down their mortgage books in violation of the accounting rules to which they have to adhere.

dopester

My maths is pretty basic.

I'm thinking this. If after this x3 rule was brought in, the outstanding mortgage book of say, RBS as one example, had 50% bad mortgages in them, but other 50% continued to repay under existing obligations, and to the profit of the lender..

Others repossessed lets say at worse, and sold off at -50% off current prices.

The other day we discussed mortgage repayments over lifetime of a mortgage.. something like "Borrowers repay £2.18 for every pound borrowed".

So over 25 years the banking system gets its money back for the bad debt on the houses sold at -50%, and can still chase up the bad debtors for many a year, unless they go bankrupt possibly.

I'm in agreement with Chewy that the mortgage book value may not be as badly affected in value (but accept you might be right about the write-down rules), but I'm very much out of my comfort zone here.

chewmylegoff

Really2 wrote: »

I think it is irrelevant the type it still as to be shown at market value.

If a bank had to sell its assets to raise funds they could only sell at market value.
If they did not their balance sheet would be a blatant lie.

If the loans come good again great but why do you think banks are dumping toxic assets and paying for the privilege.

it's nice that you think that, unfortunately the banks have to adhere to the rules that apply to the preparation of their accounts though.

again, the "toxic assets" of the banks are trading book, not the banking book assets, and are therefore subject to different valuation principles.

for the last time, it is very basic, mortgages are valued in a bank's accounts at book value less bad debt provision. that is how it actually happens. in real life.