Something you may want to read..... or may not!

[Sunfish]

There is a v interesting thread on hotcopper ATM

http://www.hotcopper.com.au/post_threadview.asp?fid=273&tid=1475305&msgno=46041#46041

I don't think you need to sign in.

There is the usual argy-bargy between the bulls and bears which I would not normally bring to your attention, but a guy called Country Writer comes on-line. He makes a couple of interesting points, one has been dismissed here but the other I've never heard mentioned.

They are:

- top up clauses for negative equity and few recent property buyers can afford this
- the mortgage insurance will not be enforceable if loans are in negative equity

If the second is true, I can see why the banks would NOT want the loans to go into neg equity and demand a top-up.

Don't dismiss this. He seems to have impeccable sources. You should read it, especially if you hold bank shares.

 

[yadreamin]

Looks like we have to sign up.
Can you give us some details

 

[willair]

Looks like we have to sign up.
Can you give us some details

You gotta have a thick skin in that site,and understand what #####hit is..
quote..




Let me put it this way the more you know the more you worry. But the greater the opportunity - buy knock down distressed assets at the right time and you will make a fortune as conditions improve but you will have to hold for a fow years - you will have to hold cash when it happens forget finance in conditions like I am suggesting might occur

 

[Sunfish]

Looks like we have to sign up.
Can you give us some details

Sign up, read what you want and then in my account untick the box (somewhere) which says you want the HC emails. They will suspend you but you can still read the site.

I'll cut n paste a little during the day though.

 

[evand]

I used to be a regular visitor to HC. There was a lot of pump and dump going on then, is it still the same?

 

[Sunfish]

I used to be a regular visitor to HC. There was a lot of pump and dump going on then, is it still the same?

I don't follow the threads on many individual companies. One I'm involved with now I'd say is more starry-eyed beginners in a group hug. It's a good contra-indicator. I've been out (looking for re-entry) for six months but the cheer leading is cringe-worthy. Is there someone trying to manipulate? Possibly.

 

[Sunfish]

This is part of his first post on the thread:

I recently spoke to a Fund guy up in Singapore and he told me the NAB was holding cocktail parties in HK, Sing etc trying to lighten their Qld property load. I checked one of the properties he mentioned they indicated 6-700k as an example of the offering - in the back of the canals in Surfers Paradise. It was on realestate.com for A$990k. A 30 - 40% discount!

When he asked about finance he got a flat refusal. There is a lot they are not telling you about the exposure of the big 4 when you take mark to fantasy away from valuations as you point out rebel1.

They had properties they would not offer as mortgagee in possession, just "helping our clients" - yeah right 'good hearted' banks! There is a damn good reason for this reluctance and cover up.

A performing loan is a 10% risk weighted asset in bank speak meaning a 10% reserve allocation is required to be held by the bank. When they declare the loan non-performing it becomes a 100% risk weighted asset - with 100% of the outstanding loan amount now required in the reserve allocation ...whoops big problem on the balance sheet!

Naturally people pricked their ears and asked questions.

I guy was going to invest in my website and knows people all through the investment world. he used to run a bond room and was head of structured products for a major international bank.

I am trying to verify now via a client who is an investment adviser - on clauses in the mortgage contracts. I was told by the almost investor that these contract have a top up clause so that if the property goes into negative equity a margin call can be made.

It gets worse and again - have to verify again before I am certain - the mortgage insurance contracts have a clause that they are not liable on default if the property is in neg equity. Another investment adviser client at another stage told me this is all true - in fact he was the one that originated that the insurance is set up this way.

Can see it now if this it true we are going to see a major poo fight because the banks will not even realize this. We don't read their (banks) contracts in depth and don't think they read all the fine print in insurance contracts! Bankers are not lawyers.

Can anybody that has actual data on this verify please as I want to be sure on this before I get too alarmed. If its true I am starting a fund to run after my gold fund
What an opportunity!

 

[Aaron Sice]

Direct from HC.

I am surprised this thread did not get more attention than it did maybe too far outside the box. You just don't hear this stuff outside major Investment, 'Special Situation' or Bond Funds or at high level bank circles such as CFO etc.

I should add my source was very reliable and I only want to verify - and to see if anybody else knows about the virtual 'margin call' clause in the Australian mortgage contracts?

The source handled the set-up of a Euro1B Fund last year, yes I do not lie it was approximately Euro1,000,000,000. It was set up as a distress fund - a 'vulture fund' if you prefer because this guy made his name up in the Asian crisis and was buying properties off 20 different banks that had to offload urgently due to balance sheet issues. Really serious issues and any of you that have been following Basel2 and the upcoming Basel3 will know how strict this new regulatory environment will be.

This is setting up a perfect property storm. Big 4 Aust banks exposed 60% of their loan books to residential property - and which bank went for market share at the top?
Look at the converging waves and consider the potential outcome...

- top up clauses for negative equity and few recent property buyers can afford this
- the mortgage insurance will not be enforceable if loans are in negative equity
- many loans already in negative equity ...and falling prices exacerbating this situation
- interest rates pushing up the pressure to default
- employment soft = more potential defaults
- higher interest rates making it harder to borrow
- banks constricting (carefully huh!) loans due to over exposure to the sector using tougher qualification guidelines

Do you get the senior level this data came from guys??
Head of structured products over Australasia for a major international bank.

Can start a Euro1B fund with bank and wealthy investors as the investors. Interestingly a bank that failed one of the stress tests in Europe proceeded to buy out the management company they set up to run the Fund because it could not get funding cheaper than 8.5% - was effectively out of business... It needed the control of the cash to re-balance their balance sheet :-(

Has direct experience of setting up Vulture Funds - was buying property in the Asian melt down at 20% in the dollar on the debt and that reduced as the crisis deepened.

Would love to see discussion on the mortgage and mortgage insurance contracts because we could see an Asian crisis level event in Australia if this guy is right. The RBA and Westpac had to go to the Fed in 2008 for emergency funding and crowding out can force rates up very high for all the wrong reasons - anybody who understands the debt markets and counter-party risk will know what I am talking about. Very sorry this is too long.

Let me put it this way the more you know the more you worry. But the greater the opportunity - buy knock down distressed assets at the right time and you will make a fortune as conditions improve but you will have to hold for a fow years - you will have to hold cash when it happens forget finance in conditions like I am suggesting might occur

 

[Aaron Sice]

http://news.ninemsn.com.au/article.aspx?id=8257208

interesting article for NSW/Vic.

 

[Token Funder]

Haven't looked at in detail but someone who says mortgage insurance doesn't pay in circumstances of "negative equity" is exactly 180 degrees off base.

Essentially, mortgage insurance only pays if there's negative equity...that's why it exists.

One wonders what this snoozer thinks it covers....

 

[tom32]

Haven't looked at in detail but someone who says mortgage insurance doesn't pay in circumstances of "negative equity" is exactly 180 degrees off base.

Essentially, mortgage insurance only pays if there's negative equity...that's why it exists.

One wonders what this snoozer thinks it covers....

I was thinking the same.

The only thing I could think that he is meaning; where a loan is first non-performing, say 90 days plus in arrears and then it starts to move toward negative equity as the interest rate bills pile up, I could imagine that the bank may have to answer to the insurance company if they choose to wait for an excessive time, holding the non performing loan till it becomes a loser with a large deficit agaisnt the collateral.

Realising the collateral assets value at a loss some time down the line after many months of negative movements in the market, the insurer could say even possibly without an express term IMO, we are only liable for that period of time that the person was not in arears by more than 90 days, which could limit the loss for the insurer. As one party generally has to act where it is reasonable to do so to mitigate losses for the other in an insurance contract. You cannot just let things turn to **** and watch thinking insurance has got you covered.

I would expect then that the banks have some responsibility to limit the loss of the insurer as houses move into negative equity and the borrower is in arrears. If they do not diligently forclose, realise the loss then I expect the insurer would only be partly responsible for the loss, that part before the bank should have forclosed on the home and commenced a sale process.

 

[Intrinsic_Value]

Haven't looked at in detail but someone who says mortgage insurance doesn't pay in circumstances of "negative equity" is exactly 180 degrees off base.

Essentially, mortgage insurance only pays if there's negative equity...that's why it exists.

One wonders what this snoozer thinks it covers....

and here we have someone with experience in the industry as oppossed to outsiders.

Yes there are risks on the horizon, but whenever the market realises these risks, they are very quick to price them in, sometimes more so.

This is not 2007, the market is jumping at shadows, real or otherwise. Its a case of shoot first, ask questions later.

I am underweight banks, because i think the main catalyst for growing earnings is not arround at the moment, but at the same time, does one honestly think that the banks 'risk' officers are not on the game at the moment.

That talk about banks not being lawyers, is just junk in my opinion. Just listen to dazz's posts.

 

[tom32]

and here we have someone with experience in the industry as oppossed to outsiders.

Yes there are risks on the horizon, but whenever the market realises these risks, they are very quick to price them in, sometimes more so.

This is not 2007, the market is jumping at shadows, real or otherwise. Its a case of shoot first, ask questions later.

I am underweight banks, because i think the main catalyst for growing earnings is not arround at the moment, but at the same time, does one honestly think that the banks 'risk' officers are not on the game at the moment.

That talk about banks not being lawyers, is just junk in my opinion. Just listen to dazz's posts.

While the specifics around loan asset writedowns upon realisation of a collateral assets value and further this supposed shortfall from insurance will remain a mystery to "bank outsiders" what is clear to anyone with even a periphery involvement or even interest in the industry is that of the two parties to these contracts; banks and insurers, it is the insurers who are in the better bargaining position when from 2008 we had one of them exit Australia and of the remaining two one of them threaten too.

Commercial knowledge does not of itself allow you to push for good terms. Both banks an insurers have enough lawyers to understand exactly what they are doing, it is more of a case if they have any choice around accepting terms which put the risk on them.

So definitely agree with you that the banks have enough lawyers to get this stuff right, but that does not mean they have favourable terms over those they would have been able to secure pre 2008.

They have PMI or Genworth as far as I know which is not a lot of choice. When you have two parties offering a service they tend to close ranks especially around terms even if they compete on price.

 

[Token Funder]

I was thinking the same.

The only thing I could think that he is meaning; where a loan is first non-performing, say 90 days plus in arrears and then it starts to move toward negative equity as the interest rate bills pile up, I could imagine that the bank may have to answer to the insurance company if they choose to wait for an excessive time, holding the non performing loan till it becomes a loser with a large deficit agaisnt the collateral.

Realising the collateral assets value at a loss some time down the line after many months of negative movements in the market, the insurer could say even possibly without an express term IMO, we are only liable for that period of time that the person was not in arears by more than 90 days, which could limit the loss for the insurer. As one party generally has to act where it is reasonable to do so to mitigate losses for the other in an insurance contract. You cannot just let things turn to **** and watch thinking insurance has got you covered.

I would expect then that the banks have some responsibility to limit the loss of the insurer as houses move into negative equity and the borrower is in arrears. If they do not diligently forclose, realise the loss then I expect the insurer would only be partly responsible for the loss, that part before the bank should have forclosed on the home and commenced a sale process.

All the rules that apply to the ordinary punter and their insurer apply to lenders and mortgage insurers, so mitigating one's loss is a given.

The quote from hot copper is, however, straight out wrong.

Negative equity is exactly what is covered and whilst there are a range of bits and pieces that aren't covered (as is the case with most insurance), the difference between your debt (including unpaid interest but excluding "penalty interest") and the sale price of the property is what the insurers pay.

In practice, once a loan is greater than 90 days and there's a chance of a claim, the insurers are involved every step of the way so there are rarely any issues. The only time you are likely not to see a claim part all or in part is if you originated a loan in breach of your own policy ot otherwise cocked up.

 

[tom32]

All the rules that apply to the ordinary punter and their insurer apply to lenders and mortgage insurers, so mitigating one's loss is a given.

The quote from hot copper is, however, straight out wrong.

Negative equity is exactly what is covered and whilst there are a range of bits and pieces that aren't covered (as is the case with most insurance), the difference between your debt (including unpaid interest but excluding "penalty interest") and the sale price of the property is what the insurers pay.

In practice, once a loan is greater than 90 days and there's a chance of a claim, the insurers are involved every step of the way so there are rarely any issues. The only time you are likely not to see a claim part all or in part is if you originated a loan in breach of your own policy ot otherwise cocked up.

Cheers,

I know it is not something you are likely able to disuss on a public forum but if you had to say in which direction mortgage insurance was heading for banks is it becoming easier or harder to secure favourable terms?

At a guess I would have thought like securing funding for Australian mortgages securing insurance was also becoming more difficult and so the insurers would be expecting to make some hay of the situation.

Also what happens around hardship provisions? do insurers have an active role in deciding who does or does not get access to them and if the market was going south is it possible that insurers take a more active role in such a decision?

 

[Token Funder]

Cheers,

I know it is not something you are likely able to disuss on a public forum but if you had to say in which direction mortgage insurance was heading for banks is it becoming easier or harder to secure favourable terms?

At a guess I would have thought like securing funding for Australian mortgages securing insurance was also becoming more difficult and so the insurers would be expecting to make some hay of the situation.

Also what happens around hardship provisions? do insurers have an active role in deciding who does or does not get access to them and if the market was going south is it possible that insurers take a more active role in such a decision?

In general terms I would say that the insurers appetite for risk is slightly greater than that of the banks. To some extent this has always been the case and though the overall appetite is well below the pre 07 I think the relative positions remain unchanged. So, overall credit remains harder to get than it was but the insurers are arguably still more flexible than banks.

One reason that the relative appetites vary is that in the current environment the analysts are very focussed on arrears and whilst LMI protects you from losses, it does nothing to assist with the arrears numbers. Another is the question of counter party risk; insurers aren't immune from collapse so you can't pretend that an insured risk is the same as no risk.

If you have an insured loan and you receive a hardship application, your options all, to one degree or another, involve increasing the potential quantum of any subsequent claim should the arrangement go pear-shaped. As a result, the insurers have to agree to whatever you put in place.

 

[tom32]

If you have an insured loan and you receive a hardship application, your options all, to one degree or another, involve increasing the potential quantum of any subsequent claim should the arrangement go pear-shaped. As a result, the insurers have to agree to whatever you put in place.

Thanks again.

I have wondered about hardship provisions because I think for some people it is better they are forclosed early than allowed to go on racking up interest debt and eventually whittle away their profits.

Some people just will not help themselves even when it is clear to everyone around them they need to sell to get back on top of their lives. Hardship provisions often do not seem to address this situation in the longer term.

I would love to know what the numbers are on hardship provisions being granted and importantly what portion of these people offered this digging themselves back out of the hole they found themselves in. At a guess I would have though about half still go on and find themselves in the crapper. If it was then broken down into LVR's I would expect those LVR .80 and above would nearly always end up right back in the crapper 12 months later with more debt.

Those on lower LVR's likely just take the opportunity to sell during the period the banks have given them a reprieve. This is clearly a win for the banks if the individual can sell the house without the banks involvement.

 

[hobo-jo]

Haven't looked at in detail but someone who says mortgage insurance doesn't pay in circumstances of "negative equity" is exactly 180 degrees off base.

Is it possible that the mortgage insurer will not pay out on the insurance if the lender (e.g. CBA) knows the borrower is in default and doesn't take action to resolve the situation? That would align with similar clauses in landlords and other insurances... If that's the case then it is entirely possible that a negative equity situation could result in the insurance not being paid out (if the lender doesn't take action to reduce the loan appropriately) as technically negative equity could be seen as a default, as per the CBA loan agreement:

Pg28 Section 3.5
The value of and title to the Security Property must be to our reasonable satisfaction at all times during the term of the Contract.We may obtain a new valuation of any security property.

Pg34 Section 9.1
You are in default of under the Contract if any of the following conditions apply;
C) Value or title unsatisfactory : We are reasonable satisfied with the value of/ or title to the security property or the security over it will be inadequate security for our Loan in accoradnce with our usual prudent credit standards.

http://www.commbank.com.au/personal/apply-online/download-printed-forms/UTC_HomeLoan.pdf

I don't follow the threads on many individual companies. One I'm involved with now I'd say is more starry-eyed beginners in a group hug. It's a good contra-indicator. I've been out (looking for re-entry) for six months but the cheer leading is cringe-worthy. Is there someone trying to manipulate? Possibly.

It's amazing how quickly the 'manipulation' story gets thrown about on HC when stocks get knocked down. If we're talking about the same company it has been delay after delay, capital raising one after the other (probably with another not too far away) at large discounts... as you've said before it's a traders stock. After selling all mine at .035 I might be a buyer again at .018

 

[Sunfish]

If we're talking about the same company it has been delay after delay, capital raising one after the other (probably with another not too far away) at large discounts... as you've said before it's a traders stock. After selling all mine at .035 I might be a buyer again at .018

I think we are Hobo. I'm not buying till it does what the chartists tell you to look for: Rise on good volume. You may be right about the 1.8c but I won't be buying there.

 

[Sunfish]

Back on topic:

Originally Posted by Token Funder
Haven't looked at in detail but someone who says mortgage insurance doesn't pay in circumstances of "negative equity" is exactly 180 degrees off base.

I've thought about this and agree with TF that "negative equity" appears to be the event being insured against. Country Writer may well have been feeling a little hubris and red wine but I'll continue to read him with interest.