negative equity?

[brains]

Hi all

I was chatting with a non property investing friend of mine yesterday (the type that says "its all too risky, i should have no debt whatsoever")

Anyway, he was telling me about the property market in Canada a few years back had absolutely collapsed, like properties halved in value over a couple of years for some reason. Then asked me if the same happened here, would the bank foreclose on the loan, even if servicing the loan was no problem, would the fact that the bank's security is worth a lot less than the loan be enough of a reason for the bank to want to discontinue the loan. I replied that i didnt have a clue but i'll put it on the forum and see if some property gurus know the answer. (Not that a property collapse happen here, its still an interesting question)

Thanks

 

[Jas]

Originally posted by brains

Then asked me if the same happened here, would the bank foreclose on the loan, even if servicing the loan was no problem, would the fact that the bank's security is worth a lot less than the loan be enough of a reason for the bank to want to discontinue the loan.

Quick answer = No.
Banks don't do 'margin calls' as they do on stocks. If servicing the loan is not problem, the banks would be stupid to lose money on calling the loan in.

Jas

 

[Sim]

Long answer = Yes.
Banks are quite within their rights to "call in" a loan at any time - even with very short notice - read your loan contract, it's all in there !

In practice they would not generally do that, but if some major event caused a massive drop in property values and the banks found themselves very exposed, their risk minimisation strategies may force them to call in a large number of the riskiest of those loans to reduce their exposure.

And I think that assuming that banks are not stupid is a rather dangerous practice !

 

[stirling]

An interesting aside to banks calling in the more risky loans.

On a number of rural properties during the time of overseas loans (10 years ago?) many farmers could not maintain their loan payments.

The banks sold off the farms of farmers who had borrowed conservatively, while farmers that owed more than 100% of the value of the farm (depressed) were allowed to stay on as the banks knew they (the banks) would take a loss if they sold these farms. The banks preferred to allow the farmers to hang on until farm prices increased.

So ironically conservative borrowers were penalised to reduce the banks risk, heavy borrowers were allowed to stay.

 

[Ross Sneddon]

Hi

Banks don't have margin calls similar to margin calls on equities BUT they sure as hell call in loans under whatever name you care to use. All contracts have that written into them.

The big fear facing the Rural comunity at the present trying to survive the drought is that the banks can and will call in loans if the bank perceives that the farmer cannot repay at least the interest on the loan or the loan itself.

When Rural people call on the Government for assistance, one of the forms of assistance they are looking for is to have the banks restrained from calling in loans, and all Governments will do their utmost to dodge the question.

Banks call in loans, lots of them, every year on a continuing basis with no compassion at all.

They also declare multi billion dollar profits each year. They aren't stupid, just greedy.

Regards

Ross

 

[paulzag]

A company I knew had an experience. NAB noticed they didn't have their paperwork right on an overdraft and loan facility that had grown from $250K to $2.1M over the years. The facility was secured by $3M in real estate.

NAB's risk assessment team came in with Deloittes in tow to assess the situation. The client was given a bill for $25K consulting and a report from Deloittes that didn't understand the business. The Deloittes report said the company would be out of business in 2 years.

So the company had $2.1M in debt against $3M in assets. (70%LVR). It operated a business to generate cashflow for servicing debt and actually made it's money in property development. It hadn't missed a payment in 10 years.

The bank called the loan. And rendered a bill for the consulting.

The directors removed all their business from NAB. The company is still trading 4 years later.

 

[Kevmeister]

Good for them (the customer, not NAB)! Is there also a clause in contracts that says a bank can charge you for consulting fees to help them assess their risk?

Whilst $2-3 million is a lot of money in my eyes, I think NAB could flush it down the toilet and not really notice, so pulling all accounts from NAB would be like water from a duck's back.

Kevin.