They Go Up-diddly-up-up

Generali

michaels wrote: »

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....

You would be amazed at the costs banks actually have.

When I worked in an FX department we calculated what would happen if someone struck the correct trade but wrote the wrong number on the piece of paper that was used internally to communicate the details of said trade.

The wages costs alone of fixing that were about £25 in the late 90s (perhaps £60 now??).

Banks are pretty bloody places to work which is one of the reasons they pay a premium.

Generali

cells wrote: »

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

Precisely. And that was how banks managed to spoof the system because there was a knowledge gap on lending.

It's great business if you can do it. People were (apparently) taking pre-approved credit card forms around homeless hostels and half way houses. The game was to lend as much as possible and to let the ratings agencies assume that standards were as they had been.

Generali

cells wrote: »

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

I disagree with that. What it tells us is that investors should diversify.

At work we have a team that is devoted to managing the gains from diversification and they do it extremely well. The only demonstrated free lunch in economics comes from diversification. That's why I think BTL is a crap investment for most on a risk adjusted basis.

cells

Generali wrote: »

Precisely. And that was how banks managed to spoof the system because there was a knowledge gap on lending.

It's great business if you can do it. People were (apparently) taking pre-approved credit card forms around homeless hostels and half way houses. The game was to lend as much as possible and to let the ratings agencies assume that standards were as they had been.

Not sure I believe that. it Doesnt make sense for many reasons one being that the default would be within a month so would do nothing to let you grow your lending book to pawn off to unsuspecting MBS buyers. Not to mention basic common sense like his do you lend to someone with no ID or a home address etc.

Anyway transparent MBS seem a decent financial product. It akin to allowing a large group of mortgage borrowers to issue their own paper at AAA ratings.

antrobus

michaels wrote: »

... but it still seems 10% could default and it is still better business than safe lending.....

Basically yes.

The risk of default has to be priced. If you get it right, it's trebles all round. But if you get it wrong there can be consequences.

michaels wrote: »

...Whether it is morally right to lend money on property anticipating a 10% default rate is a different question....

Repo rates on UK mortgages are less than 1%. Default rates would be higher, if only because people often miss a mortgage payment without involving the lender any loss. In fact, lenders typically only regard it as a problem when mortgage repayments become more than three months in arrears.

cells

Generali wrote: »

I disagree with that. What it tells us is that investors should diversify.

At work we have a team that is devoted to managing the gains from diversification and they do it extremely well. The only demonstrated free lunch in economics comes from diversification. That's why I think BTL is a crap investment for most on a risk adjusted basis.

Can you expand on that

Most investors in startups are putting their life savings (and sometimes the family home) on opening their own business. I doubt anyone would lend to them and if there was a bank or investor willing to lend to this group the charges would be stupid as defaults would be somewhere in the region of 90% so interest rates would need to be in the region of 1000+ % a year.

I've said this before but I reckon the small business startup sector is too competitive and is a net capital destroyer not a creator which would mean we would be better off if the majority just didn't do it and kept their money in a bank or put it into the ftse100.

Generali

cells wrote: »

Can you expand on that

Most investors in startups are putting their life savings (and sometimes the family home) on opening their own business. I doubt anyone would lend to them and if there was a bank or investor willing to lend to this group the charges would be stupid as defaults would be somewhere in the region of 90% so interest rates would need to be in the region of 1000+ % a year.

I've said this before but I reckon the small business startup sector is too competitive and is a net capital destroyer not a creator which would mean we would be better off if the majority just didn't do it and kept their money in a bank or put it into the ftse100.

Happy to expand although probably tomorrow now. Which bit do you want me to expand upon?

cells

Generali wrote: »

The only demonstrated free lunch in economics comes from diversification. That's why I think BTL is a crap investment for most on a risk adjusted basis.

I wonder if there is any resentment in the city for BTL folks who are less financially smart than they but managed to earn greater returns on investment?

Did the city miss the boat on this one? or is it really a poor (relative) risk adjusted investment?

The FTSE is up 75% over the last twenty years while London is up 430% and thats on a straight cash investment not on borrow to buy which has leveraged gains even further in favour of the novice BTLer

gadgetmind

cells wrote: »

Did the city miss the boat on this one? or is it really a poor (relative) risk adjusted investment?

It's a single asset class that's very illiquid and is prone to government meddling. Now that tax relief on borrowing is being set to BR only, quite a few people will want out. They may not find their paper profits quite so easy to realise if everyone runs for the doors at the same time.

chucknorris

gadgetmind wrote: »

It's a single asset class that's very illiquid and is prone to government meddling. Now that tax relief on borrowing is being set to BR only, quite a few people will want out. They may not find their paper profits quite so easy to realise if everyone runs for the doors at the same time.

There will not be a max exodus, the most significant result of the forthcoming tax changes, will be that the number of new landlords entering the market will reduce dramatically, secondly some highly leveraged landlords will leave the market, and thirdly there will be some upward pressure on rents.