Debate House Prices
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Pretend and Extend

Graham_Devon
Posts: 58,560 Forumite


Interesting stuff here..
Never actually thought about it like that. Can anyone confirm if this really is an issue for lenders?
Insiders say the thinking goes like this. Imagine you are a bank that has 10 mortgages on houses from the same street, each of them valued on the books at £100,000. One of the mortgage payers is in arrears. As a bank, you have the choice of repossessing the house but you know if you do so it will probably fetch only £80,000 when resold.
The problem for the lender is not just that it makes a £20,000 loss on one home but that the book value of every other house in the street also has to be adjusted. At a stroke, the bank's assets have been reduced by £200,000. In these difficult times, no bank wants to destroy the asset side of its balance sheet.
As a result, lenders have gone easy on borrowers in difficulties, giving them more time to pay and turning a blind eye when they fail to meet their monthly payments in full. This is the "extend" part of the equation, and has resulted in a much smaller number of repossessions than during previous downturns. By keeping people in their homes, lenders have prevented house prices from falling, thus retaining their theoretical book value. That's the "pretend" part.
The problem is that "pretend and extend" only works for so long. Some people still need to move, while others will be so financially hard-pressed that they will face foreclosure. The lack of first-time buyers eventually has an impact. That, simply, is why there will be further falls in house prices, and why the weakening market will trigger a policy response. The Bank of England left policy on hold today, but an extension of the quantitative easing programme now looks far more likely over the coming months.
Never actually thought about it like that. Can anyone confirm if this really is an issue for lenders?
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Comments
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Graham_Devon wrote: »Interesting stuff here..
Never actually thought about it like that. Can anyone confirm if this really is an issue for lenders?
I'm no expert but I seem to remember from a very dull financial lecture a few years ago that all companies are required to ensure that their fixed assets are regularly valued to ensure they are accurate. I might be wrong, but if you don't do this isn't it classed as a type of fraud on your balance sheet? I'm sure someone will come along who knows more than me, but my understanding is that the bank would have to reassess the value of any falling assets regardless of whether another house on the street sold or not. Interesting article though.0 -
In many industries exposure is always monitored. Whether it be by type, location, expiry date. As a higher concentration in any particular area obviously leads to higher risk.
Contract books are run on a top down down basis not on bottom up as many people assume. So that a particular single event will not lead to total collapse.
Mortgage applications can be declined for reasons such as being in the wrong post code. Or even just a reduced advance.0 -
Interesting. The banks have certainly appear to have been more lenient this time.
I think some states in the US are different (i.e. the borrower can just walk away), but until the recent balls-up (fraud) being uncovered with the legals and foreclosures, the banks there didn't seem to hold back as much?
Or maybe there are just more lenders there so the mortgages are not so concentrated amongst a few lenders. Thus less of an impact on the balance sheet when revalued.0 -
Graham_Devon wrote: »Interesting stuff here..
Never actually thought about it like that. Can anyone confirm if this really is an issue for lenders?
every lender will/should know their exposure in every market, region and local area. they probably won't over-expose themselves in certain places, maybe even by post code.
this relates to demographics, employment etc...
this isn't anything new.0 -
Graham_Devon wrote: »Interesting stuff here..
Never actually thought about it like that. Can anyone confirm if this really is an issue for lenders?
Graham.
!!!!!! did you think we meant when talking non stop about balance sheet destruction?
That a secretary puts it in the shredder????:rotfl:“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
Below is a link to Barclays accounts and the relevant note for the loan book:
http://www.barclaysannualreports.com/ar2009/files/Annual_Report_2009.pdf
Note 15, page 221.
I haven't worked on the accoutns of a bank before, so happy to be corrected, but it looks like the following to me:
The "gross loans" is just the outstanding value of the loan. So if person A has £82k of a mortgage left, £82k will go in here.
They then provide for impairment (or bad debts - £10.7m).
So if one house sold on a street for £80k they would not have to recognise that as the value of the loan doesn't drop. Just because the asset backing a £90k loan is only worth £80k doesn't mean the loan is not worth £90k. If they pay £90k the bank gets £90k.
They only provide for the loan if they don't think it will be repaid.0 -
Procrastinator333 wrote: »They only provide for the loan if they don't think it will be repaid.
They have to make provisions on the books for non performing loans.
They also have to maintain capital adequacy requirements.
If the value of security for mortgage loans is reduced, it impairs the banks balance sheet, and so requires it to build up more capital before lending further.
This doesn't just impact mortgage lending. Also consumer and business lending.
Declining house prices feed through very rapidly into constrained business lending and reduced consumer spending. Which negatively impacts the economy.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
HPI debt-junkies ....
Ever get the feeling you've been played."The problem with quotes on the internet is that you never know whether they are genuine or not" -
Albert Einstein0 -
papalimabravo wrote: »Interesting. The banks have certainly appear to have been more lenient this time.
Plus reprocession of homes is against government policy so with some banks being bailed out directly by the government or being helped by other banks being induced into buying them by the government brokering the deal, it wouldn't be a good idea to go against the government.I'm not cynical I'm realistic
(If a link I give opens pop ups I won't know I don't use windows)0 -
HAMISH_MCTAVISH wrote: »They have to make provisions on the books for non performing loans.
They also have to maintain capital adequacy requirements.
Capital requirements are a different question.
"provisions for non performing loans" That is exactly what an impairment is.
There is a difference between a non performing loan and a loan on which the security is worth less than the loan. For non secured lending, they don't show that with a zero value do they? No.
Gross lending is the value of the loans outstanding. The impairment is the total out of that loan book they don't expect to get back. Increased arrears on mortgages and defaults feed in to the level of impairment required. If they had customer A with a mortage of £100k and a property valued at £100k and custoemr B with a property valued at £85k and a mortgage of £100k they would still show an asset of £100k.
They will only devalue when they think they won't get it back. The level of devaluation is impacted. Int he example above, they would not need to devalue the loan of A by much as they have the security of the asset. But if B stops paying they need to write off £15k off the loan.
If such a provision does exist in there, please give me the page and reference number.0
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