"Margin calls" on property

[GZM]

I've just bought another IP, and am very highly geared at the moment (say 88% LVR). Interest rates are all locked in for 5 years and I won't have a problem meeting ongoing repayments/related costs.

I want to hold all of these properties for the long term.

My concern is that, if property prices fall, is there a chance that the lender will make a "margin call" (or whatever its called) and require me to pay, say, $50,000 to reduce my LVR?

If lenders can do this, is it a real risk?

 

[Ausprop]

OH GAWD... this raised its head on another forum a couple of years back and resulted in a heated and protracted debate.

 

[The_Bludger]

This has been on my mind for a while as well. Doesn't really matter if you have 1 or 2 IP's, as you could probably absorb the costs if you had planned for it, but if you own 3 or more and living on the edge, you'd be pretty much screwed...

 

[Peter_Tersteeg]

Theoretically it could happen. Realistically though, if the lender isn't getting into fincaical trouble and you continue to meet your commitments to the loan contract, it's unlikely they'd do it.

 

[GZM]

PT_Bear

I haven't got any loan/mortgage documents with me, but I presume this right is built into the contracts? Is that right?

 

[skater]

I'm with PT Bear on this. What would be the point of banks making margin calls on resi property, where the loan is being paid out on time. Of course, if you default, then you're playing in a whole other ball park.

 

[Ausprop]

I recall some talk of not being able to under the UCC

 

[steveadl]

How would the bank even know?

Wouldn't it also entail sending out valuers to hundreds/thousands of properties the bank thinks have decreased in value? Would be a logistical nightmare, and I doubt they'd just decide all of a sudden to send valuers around at random. They can't just assume people's indivdual properties have dropped in price.

The only way the bank would find out would be through your own actions eg. you want to access more equity so apply to the bank, and therefore valuers are sent out. You'd be unlikely to ask for more money from the bank if you are fairly certain your values have decreased and therefore LVR has increased - would be a pointless exercise.

 

[The Y-man]

.... if the lender isn't getting into fincaical trouble ....

So..... if the lender is in financial trouble and they can not onsell the loan because the underlying security is deemed to be less than the loan value.....???

Cheers,

The Y-man

 

[alexlee]

Presumably the loans become part of the bank's assets in a bankruptcy proceeding?

 

[THEHEATH]

I know it isn't exactly the same thing but I remember reading in a thread in here in the past couple of days that someone contacted a bank after discovering some problems that needed fixing for an ip and the bank canceled the loan. Can't quite recall if it was during the loan approval process or after after it had already been approved though. The reason for the cancellation being that the problems meant the underlying security was no longer worth what it was originally thought to be (due to the need for the repairs).

 

[Perp]

That was me, THEHEATH. My solicitor made a conveyancing error; searches showed major drainage problems that would cost $125K to fix but the solicitor failed to notify us and we didn't find out until after settlement. We went to the lender to ask for additional funds to fix the drainage, and they not only said no, but said that the security was now no longer as valuable and they were considering calling in the loan. Thankfully this was all verbal and they didn't follow through, but it was nerve-wracking nonetheless. My mortgage broker said they're very reluctant to call in a loan and that as long as we kept up payments, we'd be OK. Thankfully he was right about them being reluctant to actually call in a loan, as we were in fact unable to make payments for a few months and they still didn't call in the loan. And this was an IP - I imagine they'd be even more reluctant to go through with calling in the loan in a residential situation - lots of bad press for them. So I'd suggest that you'd have to be in a pretty dire situation for the loan to actually be called in, and as highlighted by others, they're not going to proactively go out looking for properties that have fallen in value if you're making payments. But yes, do be careful about asking for extra money if the value of your security has been compromised!

But they did threaten to call in the loan a second time for different reasons later in the same project - watch out for the whole sorry tale in April API's "My Property Nightmare" column. Thankfully it all worked out OK in the end - a profitable project despite incredible obstacles.

 

[casper007]

I've just bought another IP, and am very highly geared at the moment (say 88% LVR). Interest rates are all locked in for 5 years and I won't have a problem meeting ongoing repayments/related costs.

If lenders can do this, is it a real risk?

Did you use LMI (Mortage insurance)? If you were to default on your loan(only way the bank would know that value had dropped) then they could foreclose and the LMI would pay out any loss to the bank. Then LMI would chase you to Bagdad and back to get their money.

Simple ... don't tell them and keep up with repayments

 

[RetireEarly]

Don't worry about it... the bank won't call in a loan unless you are in default.

Negative Equity Happens from time to time and usually is a result of people borrowing too much... eg 100% in a flat market eg. Sydney ( western suburbs).

LMI is taken out for 80%+ loans and therefore protects the bank if you default and they sell up and a shortfall exists... keep your nose clean and you'll be fine.

 

[Bradsdad]

I'm of the opinion that the lenders couldn't do this but this isn't in anyway based on absolute fact.
Most lenders will lend up to 80% without LMI. Their reasoning is that there is little risk of property values falling this amount. Anything over and they are still not at risk as the Insurers pay them out. From the insurers point of veiw, they receive premiums (sometimes quite hefty) to cover any debts they cannot recover from a client should the need arise.
If the lenders were so concerned with falling prices then they have the opportunity to drop the LVR from 80% to say 70% should their risk management area see fit. As they have taken the risk they shouldn't have ant right to make a "margin call" on a property.

As other replies have mentioned, if you keep up your repayments the lender would have no cause to even consider this strategy (if it was possible). The way the bank make monet from you is by charging interest. They'd be mugs to try and have you reduce your debt as it would cost them revenue. It was also mentioned that the bank would need to individually value all their security on their book (well at least say in the say 90% LVR range) to find out it's exposure. This would be such a costly exercise.

They only other way of them finding out would be if you required additional finance and a valuation was done. In this case I feel your new application would be knocked back but the existing debt would remain.
The only thing I could see the lender doing is forclosing as soon as it was legal to do so if you were in arears on the loan. this would at least minimise their risk of further downturns.

To be absolutely certain of this I suggest you take your mortgage documents to your solicitor for clarification. I'd suggest that the clause (again if there is one) would be here and not in your letter of offer. I cannot ever remember seeing such a clause in a Letter of Offer and I've read quite a few in my time. I must admit I've never read front to cover of Mortgage Documents as there isn't a need for a MB as concerns in regards to Mortgaage docs need to be answered by the client's solicitor. And as a borrower (who should read evreything) I'm very slack and have never bothered ~~SMACK~~


Regards
Steve

 

[landlubber]

Keep your nose clean & you're OK.

We've asked our lender (big four bank) this question "straight up" several times. Their response has always been "if a residential property loan is not in default and the required payments are being made on time....it just won't happen. " I have also been advised that this "rule" does not apply to commercial IP where the values (for security)are greatly dependent on the yield/rent.
If the yield falls ( e.g. long vacany ...?) then ....
LL
PS Somewhere along the track I also was given the (good advice) to NEVER, EVER use 100% of a LOC . So we now have this as our "12th commandment".