"Breakeven Crash Requirement"

Generali

HAMISH_MCTAVISH wrote: »

Good Grief...

It's the so called "bad bank" that has been spectacularly profitable!!!


http://www.thisismoney.co.uk/money/markets/article-3127261/Bad-bank-hits-profit-Lender-set-deal-wreckage-Northern-Rock-Bradford-Bingley-profitable-RBS-TSB-Virgin-Money-together.html#ixzz3y1USrP6K

How could you not know this???

That's meaningless looked at in isolation.

NRAM had to be lent £27,000,000,000, or almost a third of the value of its mortgage assets:eek:, to keep going. Even then they managed to lose £1,500,000,000 in 2008 and £260,000,000 in 2009.

As the Chairman states in his statement in the 2010 accounts:

Both firms benefited from the low cost of funding provided by the Government and this enabled profits to be achieved. Underlying profits at NRAM were £277.4m and at B&B were £200.1m. In addition, profits were generated from liability management exercises whereby debt capital instruments issued by both companies were purchased back from holders at a market value below their par value. This generated extra shareholder equity of £951m for NRAM and £566m for B&B which together with the retained profits has left both firms with high quality capital resources at the year end

(NB in 2010, NRK and B&B's bad banks were amalgamated).

The NRAM story isn't one of triumph over financial adversity, it's a story of what happens when you get very cheap financing from the state and couple it with a mortgage book where many customers can't get mortgage funding elsewhere (the mortgage book will be concentrated up North and on high LTV I would imagine).

NRAM has 6% of customers in arrears (per 2015 Annual Report) vs a CML average of 1.29% at the end of 2014.

Graham_Devon

See, eloquent

cells

Generali wrote: »

That's meaningless looked at in isolation.

NRAM had to be lent £27,000,000,000, or almost a third of the value of its mortgage assets:eek:, to keep going. Even then they managed to lose £1,500,000,000 in 2008 and £260,000,000 in 2009.

As the Chairman states in his statement in the 2010 accounts:



(NB in 2010, NRK and B&B's bad banks were amalgamated).

The NRAM story isn't one of triumph over financial adversity, it's a story of what happens when you get very cheap financing from the state and couple it with a mortgage book where many customers can't get mortgage funding elsewhere (the mortgage book will be concentrated up North and on high LTV I would imagine).

NRAM has 6% of customers in arrears (per 2015 Annual Report) vs a CML average of 1.29% at the end of 2014.

Isn't NRAM trying to wind down?

Which would explain its higher arrears (eg no new customers to dilute existing arrears) and customers in arrears unable to move to other lenders.

Also if the mortgage book was concentrated in the north (was it really?) That would explain why it has had a harder time than say a bank that was concentrated in the south east. Prices went up in the SE so reduces the risk of lending that was done there whereas prices in the north are flat or down a bit.

Also arrears often don't result in losses. The only person I know to have got in arrears was someone with about a £100k mortgage and a house worth close to £400k. He sold it paid the bank in full and walked away with over £250k

Generali

cells wrote: »

Isn't NRAM trying to wind down?

Which would explain its higher arrears (eg no new customers to dilute existing arrears) and customers in arrears unable to move to other lenders.

Also if the mortgage book was concentrated in the north (was it really?) That would explain why it has had a harder time than say a bank that was concentrated in the south east. Prices went up in the SE so reduces the risk of lending that was done there whereas prices in the north are flat or down a bit.

Also arrears often don't result in losses. The only person I know to have got in arrears was someone with about a £100k mortgage and a house worth close to £400k. He sold it paid the bank in full and walked away with over £250k

NRAM is trying to wind down but given the length of a typical mortgage book is about 10 years I'd be very surprised to see 5x arrears result just from that fact.

Arrears don't always result in losses but they are a very good indicator of your probability of making a loss. Don't forget that NRK was making 125% loans (actually 100% secured loans plus a 25% unsecured loan) 8 years ago and they were lending primarily in the North. There will be plenty of borrowers that are in negative equity despite 8 years of repayments on the 100% loan plus also have a 25 year unsecured loan to repay.

If NRK was such a good bet then they wouldn't have gone bust. Plenty of banks rode out the GFC and came out the other side just fine. As will happen in the current markets for oil and steel, the efficient, well run companies will survive and the chancers will go bust. NRK were a bunch of chancers that were warned repeatedly by the paper tiger that was the FSA. When the poo hit the fan NRK went bust because they ignored the warnings.

HAMISH_MCTAVISH

Generali wrote: »

That's meaningless looked at in isolation.

NRAM had to be lent £27,000,000,000, or almost a third of the value of its mortgage assets:eek:, to keep going.

We've had this argument before.

That liquidity injection had nothing to do with the quality of lending or number of loan defaults with mortgage lending.

So GD's repeated claims that NR failed because of the quality of mortgages it issued is wholly inaccurate.

NR needed a huge injection of working capital to replace funding no longer available from the global markets when the entire credit system froze in 2007/8.

As did many other banks.

Northern Rock was particularly exposed because of it's aggressive wholesale funding model, not the quality of lending it was doing.

They needed 27 billion to replace existing lines of credit coming to an end at the exact moment when the entire global financial system had just frozen up - that 27 billion was not required to compensate for losses on the lending.

Under those circumstances it matters not one jot whether your loan book was AAA or Sub Prime - no bank of that size could have borrowed on the markets.

Even then they managed to lose £1,500,000,000 in 2008 and £260,000,000 in 2009.

Which at the time you noted was a result of "kitchen sinking" write offs against the value of the book due to the new world order in securitised lending markets - Not because of mortgage defaults.

The NRAM story isn't one of triumph over financial adversity, it's a story of what happens when you get very cheap financing from the state and couple it with a mortgage book where many customers can't get mortgage funding elsewhere .

Northern Rock profited immensely from 2001 to 2006, between £300m and £600m per year.

We then had a liquidity crisis requiring cash injection to refinance the mortgage book.... And folding into NRAM.

Lets look at the NR/NRAM accounts... (and yes there's a bit of B&B in there as well for some years)

2007 accounts LOSS £ 199 million
2008 accounts LOSS £1356 million
2009 accounts LOSS £ 258 million
2010 accounts PROFIT £441 million
2011 accounts PROFIT £1089 million
2012 accounts PROFIT £876 million
2013 accounts PROFIT £1360 million (15 months - changed FY end)
2014 accounts PROFIT £1259 million
2015 accounts PROFIT £1398 million

Now on top of that you have to look at the financial interventions...

1) The direct injection of cash at the time of the bank's collapse to buy up the shares totalled £1.4bn -

2) The "good bit" of Northern Rock was sold to Virgin Money for £1bn

3) The government's stake in NRAM today is valued at £4bn+

So far - Government profit of £3.6bn

Then there was the liquidity support...

Injections of £29bn to replace the dysfunctional wholesale money markets - of which NR & NRAM has already paid back £21bn, much of it ahead of schedule.

Government on track to turn quite a profit there as well....

It was absolutely the case that Northern Rock was not a loss making entity in anything other than the very short term, which given normal quantities of liquidity in the market, is simply not a problem.

It was however facing a serious liquidity crisis that was allowed to escalate into an insolvency crisis.

Some day in the future, when the emotion has passed and people look back on this time to learn the lessons, it will be seen that Merv allowing Northern Rock to fail to try and establish "moral hazard" was one of the biggest mistakes the UK made.

The correct response from day one would have been for the BOE to provide unlimited liquidity to all UK financial institutions, and then a liquidity crisis would not have turned into a solvency crisis through inaction, as ended up happening.

This whole mess could have been completely avoided.

westernpromise

cells wrote: »

BTW if you knew this why did you not stop your sister from making a £1million pound mistake?

My sister considers herself a giant of property investment and to my knowledge never listens to or acts on any advice that does not agree with what she wants to do anyway.

She bought a £30k house on two salaries in 1980 and by gearing up was able to sell at £1.7m 10 houses later with i don't know what mortgage. She should, however, have done far better than that, but she had a habit of buying places, spending too much doing them up, and then selling them for pretty well what she'd have got through inflation without spending anything on them or paying any stamp duty.

She mistook this tor profit, spent it and bought another one. The result is that everyone who bought off her has made 10x as much as she ever has.

My suggestions at the time were to keep it and let it or to put the cash into garages or something similar. I followed my inclinations, she followed hers and I now own 3x as much property as she does.

TheeMaskedTurnip

westernpromise wrote: »

I think this observation from another thread is a really good question generally, and worthy of its own thread. Although you can only answer the question accurately ex post facto, do STRs and the like ever ask themselves what level of crash they need?

My sister STR'ed in 2006. She sold a huge place in west London for £1.7 million, intending to trade up in a downturn, and rented until capitulating and buying back in 2 years ago. My rough guess is that between those dates, she had blown £160k more on rent than her mortgage would have been. Therefore she needed the house price to be £1.54 million or less in 2014, in order for it to look like a smart trade to have sold at the 2006 price and to have rented since.

In fact the value in 2014 was £2.7 million, according to Zoopla, so she needed a crash of 43%, from £2.7 million to £1.54 million. That’s just to break even.

What complicates the calculation of what I’ll call B.C.R. - “Breakeven Crash Requirement” - is that it’s a different number for every year since you’ve been renting instead of owning. Had she got back into owning around 2011, for example, she’d only have blown £100k in rent up to that point, so a small fall to £1.6 million would have broken her even. The house was by then worth £2.1million, however, so this small fall was a 24% dip on the actual 2011 value. Hence her 2011 B.C.R. was 24%.

Had she hung on until today, she’d have blown £200k on rent and the house she sold is now worth £3.4 million. So her B.C.R. today would have risen to something like 56%.

So the picture is

2011 B.C.R. = 24%
2014 B.C.R. = 43%
2016 B.C.R. = 56%.

Unsurprisingly, then, B.C.R. trends up in a rising market. It may also do so in a falling market, counterintuitively; for example, if your landlord charges you more rent per year than house prices are falling by, as happened in 1990 and 2008.

So is 100% B.C.R. ever possible, meaning the house would have to cost £0 or less, i.e. be free, for you to be better off for having rented? The answer is yes. If you spend more on rent than the house would have cost you or been sellable for, then you need a crash of more than 100% of the current price to break even. Some of the people predicting crashes on Usenet in 1996, and Crashy Time of this parish, must be well into > 100% B.C.R. territory by now.

Of course all this ignores transaction costs, and they are quite important. They’re now so high that to sell a £1.7 million house today and buy it back immediately, you’d need a B.C.R. of about 9% just to end up back in the same boat. At some point history suggests we will see a correction, but with a 9% minimum B.C.R. it’s going to need to be pretty substantial before it’s worth betting on its timing, and I don’t know anyone who knows how to price that timing risk properly.

I have been banging on about this for years and I think you've eloquently summed it all up in an acronym for us all. Each year you rent paying off your landlords mortgage for them you need an ever increasing BCR. Basically that BCR grows exponentially year-on-year.

cells

Generali wrote: »

NRAM is trying to wind down but given the length of a typical mortgage book is about 10 years I'd be very surprised to see 5x arrears result just from that fact.

Arrears don't always result in losses but they are a very good indicator of your probability of making a loss. Don't forget that NRK was making 125% loans (actually 100% secured loans plus a 25% unsecured loan) 8 years ago and they were lending primarily in the North. There will be plenty of borrowers that are in negative equity despite 8 years of repayments on the 100% loan plus also have a 25 year unsecured loan to repay.

If NRK was such a good bet then they wouldn't have gone bust. Plenty of banks rode out the GFC and came out the other side just fine. As will happen in the current markets for oil and steel, the efficient, well run companies will survive and the chancers will go bust. NRK were a bunch of chancers that were warned repeatedly by the paper tiger that was the FSA. When the poo hit the fan NRK went bust because they ignored the warnings.

a business can fail if it is unprofitable or they can be profitable but not manage cash flow

Hamish argument is that NR was sound and profitable but what sent them under was cashflow as they could not (along with most other banks) access LIBOR due to the credit crunch. I think he makes a good argument. Had the BOE/Gov stepped in and provided unlimited liquidity (along with their USA and European counterparts) and pushed rates down near the beginning then this episode might have been avoided.

carslet

For me it would have to be a 50% crash to to put me into negative equity

TheeMaskedTurnip

An interesting thread would be one with a poll asking the crashaholics what their BCR percent is.