Guardian: 95% Mortgages "not a source of risk"

grizzly1911

ukcarper wrote: »

What exactly is that .83% figure and where do you get £50k from. Default rate less than .8% recovery rate above 80% so loss .2% or £200 per £100k.

The 50K was my suggestion as an example of a possible write off on a mortgage. It was figure out of thin air.

Whatever the figure the write off is against net income.

In my example I suggested the profit on a mortgage was say 0.5%. On a 100k mortgage that would amount to c.£6k/£6.5k throughout it's lifetime. My example suggests that 8 mortgages will have to run fully to recover that 50K. Thrug just altered the profit element a litlle to account for tax and looked at the income loss based on 1 year hit.

HAMISH_MCTAVISH

grizzly1911 wrote: »

The 50K was my suggestion as an example of a possible write off on a mortgage. It was figure out of thin air.

Whatever the figure the write off is against net income.

In my example I suggested the profit on a mortgage was say 0.5%. On a 100k mortgage that would amount to c.£6k/£6.5k throughout it's lifetime. My example suggests that 8 mortgages will have to run fully to recover that 50K. Thrug just altered the profit element a litlle to account for tax and looked at the income loss based on 1 year hit.

So you just used completely made up figures instead of the available data on margins, average default and recovery rates?

HAMISH_MCTAVISH

With a 100K capital repayment mortgage where the headline rate is 5%, cost of funds is 2%, and the lenders margin is 3%, the lender will generate £43,264 in gross profit over the 25 year term.

With a default rate of 0.78% and recovery rate of 80%, you can see how that becomes vastly profitable very quickly.

grizzly1911

HAMISH_MCTAVISH wrote: »

So you just used completely made up figures instead of the available data on margins, average default and recovery rates?

It was to demonstrate the cost of writing off a debt and the impact that has on the lending establishment in terns of effort required to make up that loss.

It has nothing to do with default rates.

I never said it was based on hard facts.

I was more thinking if you write off say £50k on one debt - #119

HAMISH_MCTAVISH

grizzly1911 wrote: »

It was to demonstrate the cost of writing off a debt and the impact that has on the lending establishment in terns of effort required to make up that loss.

The cost is the outstanding balance minus recovered asset value plus holding/disposal fees.

So 100K loan, recovery 80K, = 20K loss, plus perhaps 10K in holding/admin/disposal fees.

Assuming a (higher than actual) default rate of 1%, for every 100 mortgages of 100K issued, the bank books £4,318,776 in gross profit and £30,000 in losses, over 25 years.

grizzly1911

HAMISH_MCTAVISH wrote: »

With a 100K capital repayment mortgage where the headline rate is 5%, cost of funds is 2%, and the lenders margin is 3%, the lender will generate £43,264 in gross profit over the 25 year term.

With a default rate of 0.78% and recovery rate of 80%, you can see how that becomes vastly profitable very quickly.

You are choosing to use gross margins.

If that £50K write off wasn't made then net profits would be £50k higher.

grizzly1911

HAMISH_MCTAVISH wrote: »

The cost is the outstanding balance minus recovered asset value plus holding/disposal fees.

So 100K loan, recovery 80K, = 20K loss, plus perhaps 10K in holding/admin/disposal fees.

Assuming a (higher than actual) default rate of 1%, for every 100 mortgages of 100K issued, the bank books £4,318,776 in gross profit and £30,000 in losses, over 25 years.

Hamish you are coming out from the wrong angle.

I am not trying to dispute your calculation.

I simply asked if a Bank writes off £50k on one mortgage how much will they have to do to recover that loss. I simply used £100k mortgage value to signify how many mortgages of that amount would have to be lent to recover that write off.

HAMISH_MCTAVISH

grizzly1911 wrote: »

if a Bank writes off £50k on one mortgage how much will they have to do to recover that loss. I simply used £100k mortgage value to signify how many mortgages of that amount would have to be lent to recover that write off.

1.25 mortgages of 100K would have to be lent for every 50K write off over term.

And in the real world, they actually achieve in the region of 99 mortgages for every 30K write off.

UK mortgage lending, even when banks made a third of todays margins, and even including all the self-cert, 125% LTV, I/O, etc, was vastly, staggeringly, mind-bogglingly, profitable.

And extremely low risk to boot.

Graham_Devon

HAMISH_MCTAVISH wrote: »

With a 100K capital repayment mortgage where the headline rate is 5%, cost of funds is 2%, and the lenders margin is 3%, the lender will generate £43,264 in gross profit over the 25 year term.

With a default rate of 0.78% and recovery rate of 80%, you can see how that becomes vastly profitable very quickly.

What if....say, I dunno....base rates fell to an all time low and therefore the differential between the costs for the banks and the profits fell dramatically.

What do you think would happen to profits then?

Thats the first of 2 questions.

grizzly1911

HAMISH_MCTAVISH wrote: »

1.25 mortgages of 100K would have to be lent for every 50K write off over term.

And in the real world, they actually achieve in the region of 99 mortgages for every 30K write off.

UK mortgage lending, even when banks made a third of todays margins, and even including all the self-cert, 125% LTV, I/O, etc, was vastly, staggeringly, mind-bogglingly, profitable.

And extremely low risk to boot.

How do you reach 1.25 times?

Are you still comparing gross against net.

I don't dispute they are profitable, that is what Banks do. They are not charities.