Landlords could be a threat to banks and wider financial stability

Generali

CLAPTON wrote: »

In essence that is why I'm confused: basically what powers do they want and why they haven't asked for them
no point in waiting for another melt down and say 'we knew all about that'

From looking at the minutes of the last FPC meeting, it looks like what the BoE is doing is using its 'Powers of Recommendation' in order to try to suggest that banks lend less to BTL lenders. At the same time it is consulting with the Treasury to seek 'Powers of Direction' so that it can stop banks taking on these risks if necessary.

The recommendation is the first step of a process which appears to be:

- Identify risks
- Communicate risks and recommend a course of action to mitigate that risk
- Seek powers to reduce the risk if necessary

http://www.bankofengland.co.uk/publications/Documents/records/fpc/pdf/2015/record1512.pdf

Para 18-24.

cells

mwpt wrote: »

Well, someone in authority doesn't agree it's nonsense.

maybe they just dont want BTL or a rental sector and are thinking up silly reasons to be against it.

in what world is a BTL with 25% down and other assets more of a risk than a buyer with 10% down and nothing else as collateral?

Generali

cells wrote: »

maybe they just dont want BTL or a rental sector and are thinking up silly reasons to be against it.

in what world is a BTL with 25% down and other assets more of a risk than a buyer with 10% down and nothing else as collateral?

If the default rate is multiples higher.

A bank can only really lose money on a mortgage if the borrower defaults. BTL mortgages are much more likely to be defaulted on than OO mortgages.

cells

Generali wrote: »

I doubt that they're making this up.

I think the problem is, if prices fall precipitously as interest rates rise then banks could end up trying to sell houses into a falling market and making price falls worse.

In addition, many investors use the Wilsons' model: extract the equity that builds up from house price rises and invest it into a new place. The problem with doing this, and I suspect one of the things the BoE is worried about, is that there will be a lot of unrealised CGT liabilities which mean that there isn't anything like the equity in the house that the bank is assuming when it prices up a loan.

That is a good point however the CGT at 28% is at most 7% of the 25% making a 25% down BTL a 18% down BTL

And remember the main home. If a BTL landlord owns his own home outright and has 10 BTLs that is effectively another huge chunk of equity the landlord is putting up for the bank. So if Landlord owns a £300k home outright and has 10 x 150k BTLs at 75% LTV. The actual overall loans to values is 62.5%. Short of a 37.5% house price crash those 25% down BTLs are risk free

The only Landlord I know to have defaulted on his mortgage had a £120k loan and the house was sold for over £400k and the bank lost nothing. The man defaulted due to a divorce and the wife not cooperating in the sale.

In fact I think the banks are overpricing the risk by quite some margin as evidence by the huge difference in pricing between 25% down and 35/40% down BTL mortgages. That additional deposit is being charged at 10-15% interest rates.


anyway this already very low risk lending is imo going to get even lower risk as the interest rates as a cost rules change. Once they come in I think a lot more landlords will opt for 35% or 40% down as that will take them to much cheaper deals. 25% down being about 3.5% interest while 35% down being closer to 2.5% interest.

cells

Generali wrote: »

If the default rate is multiples higher.

A bank can only really lose money on a mortgage if the borrower defaults. BTL mortgages are much more likely to be defaulted on than OO mortgages.

Not true BTL is much less likely to be in arrears and when in arrears they are in arrears for a smaller portion of the loan. They are indeed more likely to be repossessed but not multiples higher. I think its ~ one third higher than owners but as noted they have less arrears on the loan when they are repod and likely more equity meaning a bigger buffer for a repo to a loss occurring.

Also important when a repo happens is the actual loss on the repo. If a bank repo a house with a £120k loan and sells it on for £400k as happened to someone I know its a £0 loss.


Chart 1: Repossessions, buy-to-let and owner-occupied markets


Chart 2: Arrears on mortgages, 2.5% or more of balance outstanding



Overall I would still suggest that BTL is very low risk for lenders and virtually the same as home-owner loans. repos are a little higher but there are lower arrears and likely higher equity to reduce the hit.

The most important metric would be how much the banks lost on repos for each group. The average repo loss and also the collective repo loss. Not so much the repo rate which for both groups is very low

cells

Generali wrote: »

If the bank didn't do the original mortgage they almost certainly don't know what was paid for the house. It's unlikely that they do even if they did the original mortgage.

I think your capital gains tax bit is actually no harm or not as bad as you think.

If someone takes out say £100k from an existing investment and puts that down as a deposit on a £400k home. eg 25% down, you are arguing that its not really 25% down as a portion of that £100k is due for future CGT payment

HOWEVER....... the only risk you have identified is a forced sale in a falling market. If the market is falling the CGT liability is also falling.

for arguments sake lets say a 25% house price crash happened so the £400k BTL was sold for £300k. The bank makes no loss phew. The capital gains tax due on the £100k from the other property is now completely offset against the capital gains loss on this property. so a 25% down even if taken by equity from another property is actually 25% down not 25% down minus some CGT liability

Therefore the CGT theory actually dies. CGT is due but if a forced sale at lower capital values happens its offset


correct?

cells

Generali wrote: »

If the bank didn't do the original mortgage they almost certainly don't know what was paid for the house. It's unlikely that they do even if they did the original mortgage.

???

The last BTL application I did specifically asked when I bought and how much I originally paid.

Plus for most transactions the data is freely available from the land registry. You can download it for free, its a few gig in size and it would not be difficult to do a cross check on that

mwpt

cells wrote: »

That is a good point however the CGT at 28% is at most 7% of the 25% making a 25% down BTL a 18% down BTL

And remember the main home. If a BTL landlord owns his own home outright and has 10 BTLs that is effectively another huge chunk of equity the landlord is putting up for the bank. So if Landlord owns a £300k home outright and has 10 x 150k BTLs at 75% LTV. The actual overall loans to values is 62.5%. Short of a 37.5% house price crash those 25% down BTLs are risk free

The only Landlord I know to have defaulted on his mortgage had a £120k loan and the house was sold for over £400k and the bank lost nothing. The man defaulted due to a divorce and the wife not cooperating in the sale.

In fact I think the banks are overpricing the risk by quite some margin as evidence by the huge difference in pricing between 25% down and 35/40% down BTL mortgages. That additional deposit is being charged at 10-15% interest rates.


anyway this already very low risk lending is imo going to get even lower risk as the interest rates as a cost rules change. Once they come in I think a lot more landlords will opt for 35% or 40% down as that will take them to much cheaper deals. 25% down being about 3.5% interest while 35% down being closer to 2.5% interest.

I think that despite your calculations you're simplifying the situation. A default isn't something a bank wants on their books because the entire income stream and value of the bond into which these mortgages are packaged is affected. That is exactly what caused the problem previously, as you know I'm sure. So it's not that the mortgages sit on their books and when defaulting they simply sell and fill the hole, it's a lot more complicated than that.

Besides that, even if the government is just starting to turn against BTL, that's quite fine. The only limiting factor for a landlord buying properties seems to be the willingness to take on risk and the rental cover. Once they start leveraging up and remortgaging, the more properties they have they faster they can expand and bid for more places. I really don't think this is a healthy or fair situation when owner occupiers are limited by lending multiples to salary. So in theory, market rents could rise by cramming more people into the house, pushing up the BTL bid price and OOs will never be able to compete with what the BTL can bid.

cells

Generali wrote: »

I suspect the main cause for concern is the default rate under extremely benign interest rate conditions.

If you can't make the mortgage when interest rates are this low then you've gotta wonder when you can.

The default rate is about 3,000 loans a year for BTL while the rental sector is now over 5,000,000 units with about half with a mortgage of varying size. Overall its about 0.1% of the stock default per year and remember in housing BTL or owner the majority if not all of the loan will be recovered. Unlike say a business loan where if they default there could be little to no security of any value


Also rents generally rise annually (especially in areas where rentals are more in demand and hence BTL makes a bigger portion of the stock, eg London)

Prices generally only go down in a recession and only marginally in nominal terms

And interest rates will be moved in a way as not to cause a recession. The Fed is not going to go from 0% to 5% at the next meeting. It might go from 0% to 4% over the next 5-10 years allowing rent/wage/price inflation to cover things

Thrugelmir

Generali wrote: »

http://www.fca.org.uk/

HTH.

More importantly.


"The Prudential Regulation Authority (PRA) was created as a part of the Bank of England by the Financial Services Act (2012) and is responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms. The PRA’s objectives are set out in the Financial Services and Markets Act 2000 (FSMA). The PRA has three statutory objectives:

A general objective to promote the safety and soundness of the firms it regulates;

An objective specific to insurance firms, to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policyholders;


A secondary objective to facilitate effective competition."

http://www.bankofengland.co.uk/pra/pages/default.aspx