They Go Up-diddly-up-up

michaels

antrobus wrote: »

I believe that lenders are interested in the loss as a percentage of the amount lent. 10% would actually be rather 'optimistic'; in recent years it has been more like 23%.

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/9902335/Almost-90pc-of-repossessed-homes-sold-on-at-loss.html

I must be being dim, I can't see what price the 'discount' is from - is it from the amount owed or the purchase price or something else?

antrobus

michaels wrote: »

I must be being dim, I can't see what price the 'discount' is from - is it from the amount owed or the purchase price or something else?

In Fitch's Residential Property Value Analysis report. it said 87pc of homes that have been repossessed since the start of the financial crisis have been sold at a loss. This means properties are being sold at a price below the balance of the remaining mortgage.

michaels

antrobus wrote: »

In Fitch's Residential Property Value Analysis report. it said 87pc of homes that have been repossessed since the start of the financial crisis have been sold at a loss. This means properties are being sold at a price below the balance of the remaining mortgage.

So do you think the 'discount' quoted is also compared to the mortgage value? Do you think it includes all costs and expenses?

Generali

michaels wrote: »

What exactly does that mean - that the lender typically loses 10% of the amount lent - does it relate to a specific ltv?

Yes and this is from my recollection, not a good source at the best of times, that a bank will typically lose 10% of the value of the loan from a high (85%+) LTV FTB loan on repossession.

There is a tendency to trash the house before the bailiffs come over. Sump oil on the carpet is a particular favourite I believe.

antrobus

michaels wrote: »

So do you think the 'discount' quoted is also compared to the mortgage value? ...

Yes.

This report suggests that the discount on market value is higher at 35%

http://www.mortgagesolutions.co.uk/news/repossessed-properties-sell-for-35-below-true-value/

michaels wrote: »

..Do you think it includes all costs and expenses?

I expect so. I imagine that lenders would charge all costs and expenses to the mortgage.

Jason74

Conrad wrote: »

Hope it's ok for me to mention the unbalanced economy argument here. Sure we'd all love a German industrial economy but take me as a real live example of why this is so hard. I've sold my business premises and am investing proceeds in further B2l. I would love nothing more than to invest this in a 'proper' business, how proud would I be to be doing my bit towards rebalancing the economy, but in the end it's too big a risk and no one is going to bail me out if I loose my hard earned investment money, furthermore it would detriment my children.

So whilst it's highly fashionable to bemoan the likes of me for not investing in a real business, put yourself in my shoes, would you encash your own funds and risk them on a manufacturing business?

On one sense no, of course not. The rules of the game mean that your choice is a perfectly rational one. But the fact that this is true demonstrates why the rules of the game need to change to make BTL much less attractive to investors. The budget tax changes are a good start, but much more is needed imho.

Generali

michaels wrote: »

(Have I got the maths right?)

The basic maths is right but you do omit two things:

1. Banks have leverage so every quid that they lose means that they have to find another nine or ten quid to repay their creditors being savers and other banks
2. Banks have costs. There is a massive difference between gross and net margins. Repos are very expensive. Have you seen the sort of money a banking lawyer makes these days?

Sums:

michaels wrote: »

3.99% on a 2 year fix is at least 2% above the rate for pretty much risk free lending with a 40% deposit. Supposing a repossession will cost 10% of capital loaned, that means that even if 30% default in the 2 year fix period Nationwide are still better off with this business than the zero risk 'prime' borrowers.

michaels

Generali wrote: »

The basic maths is right but you do omit two things:

1. Banks have leverage so every quid that they lose means that they have to find another nine or ten quid to repay their creditors being savers and other banks
2. Banks have costs. There is a massive difference between gross and net margins. Repos are very expensive. Have you seen the sort of money a banking lawyer makes these days?

Sums:

OK so the 10% doesn't include costs so perhaps Antrobus' 23% is a better reflection of the actual likely loss (although this is probably 'worst case' given it is based on properties purchased at peak when lending standards were at their loosest). The loans mentioned in the OP have up front fees of 999 so that probably covers set up costs but obviously losses of 23% rather than 10% change the maths but it still seems 10% could default and it is still better business than safe lending. Whether it is morally right to lend money on property anticipating a 10% default rate is a different question....

cells

Jason74 wrote: »

On one sense no, of course not. The rules of the game mean that your choice is a perfectly rational one. But the fact that this is true demonstrates why the rules of the game need to change to make BTL much less attractive to investors. The budget tax changes are a good start, but much more is needed imho.

Its not that an investment in real estate is generous (there are listed companies you can buy shares in that own homes and other property) its that an investments in a business any business is far more risky. The rewards can be greater but for every apple computers there are a million tom !!!!!! and Harry that lose their life savings and probably their families too in failed businesses ventures

This actually probably tells us that the businesses sectors are over competitive and we need less people trying and failing not more people throwing good money after bad

cells

Generali wrote: »

The basic maths is right but you do omit two things:

1. Banks have leverage so every quid that they lose means that they have to find another nine or ten quid to repay their creditors being savers and other banks
2. Banks have costs. There is a massive difference between gross and net margins. Repos are very expensive. Have you seen the sort of money a banking lawyer makes these days?

Sums:

About 20,000 repos a year if a loss of £10k a unit that is 0.2 billion

Total stock of mortgages about 1500 billion

Or 0.013% is the average cost of default on a large loan book. No wonder mortgage backed securitys were highly rated. Any idea how they faired during all these years?