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Interest only loans are Australia’s subprime
Topic Started: 16 Oct 2014, 10:35 AM (11,217 Views)
peter fraser
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Veritas
31 Oct 2014, 01:57 PM
Okay, well then we get to the nub of what Moody's is saying.

The danger here is OO IO mortgages.

To which all the arguments around investors/offset accounts/ tax burden etc don't apply.
Yes that's quite true, and if you look back miw has made the same point.

My point was that for many investment loans PPOR owners are accessing the equity from their own house, and they also use an I/O loan there so that they can concentrate on paying down their non-tax deductible loan off faster whilst leaving the investment loan unchanged.

Pre-GFC the loans may have been cross collateralised. That means we use two securities to support multiple loans. That way we could just write one large loan for the lot. Now we tend to keep loans tied to just one security and not cross collateralise, which means we end up with 2 investment loans. One against the PPOR and one against the property being purchased, so we have an I/O loan against a PPOR that we once didn't have, as well as any residual PPOR home loan.

I hope that isn't confusing. Some understanding of securities would be of benefit in understanding that explanation.

I'm not saying that there can't be a risk, but I believe that the numbers are more vague than they appear and probably noweher near what the raw figures indicate. It's kind of what happens when an analyst does a superficial assessment without drilling down into the content.
Edited by peter fraser, 31 Oct 2014, 02:15 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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stinkbug
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I have an OO IO loan. Why? Because that way I can scrape all the savings I make by paying IO across other investment loans and pile it all into my OO IO offset account and smash down the principle, whilst maintaining maximum tax deductibility of the debt.

Works a treat. Even with cashflow positive properties I get a tax refund!
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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Sydneyite
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Veritas
31 Oct 2014, 01:57 PM
Okay, well then we get to the nub of what Moody's is saying.

The danger here is OO IO mortgages.

To which all the arguments around investors/offset accounts/ tax burden etc don't apply.
No, not correct at all - you are just not getting this! :re:

There is no extra danger in the "rise" of IO PPOR mortgages, because:

* Serviceability criteria is equal to or greater than that applied for the same loan amount as for P&I

* There are MANY reasons why it is advantageous for a PPOR mortgage to be made IO, including flexibility via the use of offset accounts etc, the ability to rent your house out later and gain maximum tax advantage etc etc. Basically remove a lot of the reasons why people feel "tied down" if they buy a house - use an IO loan, and you remove many of those "ties", and instead get maximum flexibility. So yes the tax related arguments and so on do still apply.
Edited by Sydneyite, 31 Oct 2014, 02:30 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Veritas
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Sydneyite
31 Oct 2014, 02:30 PM
No, not correct at all - you are just not getting this! :re:

There is no extra danger in the "rise" of IO PPOR mortgages, because:

* Serviceability criteria is equal to or greater than that applied for the same loan amount as for P&I

* There are MANY reasons why it is advantageous for a PPOR mortgage to be made IO, including flexibility via the use of offset accounts etc, the ability to rent your house out later and gain maximum tax advantage etc etc. Basically remove a lot of the reasons why people feel "tied down" if they buy a house - use an IO loan, and you remove many of those "ties", and instead get maximum flexibility. So yes the tax related arguments and so on do still apply.
I am interrogating the answers and information being provided by the likes of yourself so stop being a prick.

I never said I was any sort of expert.

And remember Moody's are the ones sounding the alarm here.

Your argument is with them; not with me.

And BTW, its not like IO mortgage don't have an extremely bad rap. Britain:

Quote:
 
The credit feeding frenzy in suburban Britain during this time was feeding off itself. But one innovation casts a particularly long shadow. Increasing multiples, decreasing deposits, allowing self-certification and stretching the term of a mortgage are all rather tame compared with never actually expecting the repayment of mortgage debt. That was the strategy behind "interest-only" mortgages.

Interest-only deals boomed from 2002 to 2007, providing another fillip to the housing market. By 2007 a third of all mortgage sales were interest-only. And for the first months of 2008, the majority of new mortgage lending was interest-only. It had briefly become the norm. The FSA, which waved through what should have remained a niche product into the mass market, warned in late 2012 of a "ticking timebomb". By May 2013, the Financial Conduct Authority, which took over the FSA's old premises, restated this "wake-up call". Martin Wheatley, the Financial Conduct Authority's chief executive, told me: "The big concern is the 10% that as of today could get to the end of their mortgage and simply have nothing to repay the loan with."

The rapid growth of the buy-to-let (BTL) market brings together all the elements fuelling house prices. For a start, BTL changed the British housing dream from owning your own property into owning other people's property too. Many expected the credit crunch and recession to put paid to BTL. But the cult of the amateur landlord prospered in the crisis. Property values have held, rents have surged, and there have only been a piddling number of repossessions. After the new coalition government slashed planning red tape, mortgage volumes have ballooned.

A year after the crash, the old names in BTL lending were back in the game. At the National Landlord Show in Kensington in 2010, well-heeled amateur landlords leafed their way through cheap housing for sale in poorer northern English cities. "Eviction popcorn" was being distributed by a law firm promoting its ability to turf out troublesome tenants. Estate agents explained that few locals could obtain a mortgage to buy a £120,000 house. BTL mortgages, however, were priced on the basis of likely rent received.

Young first-time buyers such as Naomi Jacobs in Newcastle finds herself more in a property nightmare than a property dream.

"I'd love to buy a little house now," she told me. She wants to have a family, and as the family gets bigger so she'd want a bigger house. That is the dream. Naomi is a science graduate, a science graduate with a job. But she can't get a mortgage. She blames the buy-to-letters. "The smaller flats that first-time buyers would want are ideal for them to rent out," she sighs. "But that's the way it is these days. It's slightly cruel when you think about it."

http://www.theguardian.com/books/2013/aug/18/default-line-extract-faisal-islam-housing
Edited by Veritas, 31 Oct 2014, 02:42 PM.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Emmanuel
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Veritas
31 Oct 2014, 02:35 PM
I am interrogating the answers and information being provided by the likes of yourself so stop being a prick.

I never said I was any sort of expert.

And remember Moody's are the ones sounding the alarm here.

Your argument is with them; not with me.
Yes, well, we've seen Moondy's get it wrong on more than one occasion. I suggest that you follow what Sydneyite is saying because that's as watertight as you're going to get. At the end of the day, the banks set the criteria and they have proprietary data that includes the composition of I/O OO loans. There is no requirement that they share that information with the public.
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Veritas
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Emmanuel
31 Oct 2014, 02:43 PM
Yes, well, we've seen Moondy's get it wrong on more than one occasion. I suggest that you follow what Sydneyite is saying because that's as watertight as you're going to get. At the end of the day, the banks set the criteria and they have proprietary data that includes the composition of I/O OO loans. There is no requirement that they share that information with the public.
So I should trust the banks?

Will you be here all week you joker?
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Emmanuel
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Veritas
31 Oct 2014, 02:50 PM
So I should trust the banks?

Will you be here all week you joker?
I don't know if you'll get very far in life if you harbor conspiratorial feelings towards institutions such as banks. Whether you like it or nog, banks are an integral part of a functioning society.
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miw
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Veritas
31 Oct 2014, 11:51 AM
But the people who got really burned were the bond holders not the originators.
Totally different instrument with a totally different risk profile.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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GloomBoomDoom
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Emmanuel
31 Oct 2014, 03:14 PM
Whether you like it or nog
Haha I can't let that typo slide. :D
MSE
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miw
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Veritas
31 Oct 2014, 01:12 PM
And if it defaults who take the hit?
You need to read the prospectus to know for sure.

In the Australian case it seems overwhelmingly the issuer of the loan that takes the hit.

In the most common US case it depends on the underwriting standards. If the issuer can show that all the boxes were ticked correctly, it might be the bondholder that takes the hit but more likely it is the GSA that took the loan and then passed it through or securitised it, and if any problems with the underwriting are found then the issuer has to take it back. Uncertainty about just what circumstances the issuer would have to take it back is partly responsible for causing a big problem in the US - banks just aren't writing loans and people can't get mortgages.

Veritas
31 Oct 2014, 01:16 PM
And what risk is the bondholder taking if non-performing loans are sent back to the originator?
Heaps of risk.

a) Interest rate risk
b) Prepayment risk
c) Extension risk

to name three that spring to mind immediately.

Veritas
31 Oct 2014, 01:47 PM
1. You can pay nothing but interest for the first five years.
2. But we will only let you do that if we are satisfied that you can handle the reversion to p+ I when the time comes.

Right?
Incorrect. The bank works out the P&I payment for when the time comes (which is higher than it would be if you went P&I immediately) and only gives you the loan if you could pay that NOW.
Edited by miw, 31 Oct 2014, 04:19 PM.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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