# US sub-prime mortgage market collapse



## Markjbloggs (13 Mar 2007)

What (if any) effect will there be on this side of the Atlantic from the collapse of so many US companies offering "exotic" mortgage products?  Looks like another one is gone today, or at least looking at strategic alternatives!!


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## CupofTea (21 Mar 2007)

What's interesting is how HSBC found it needed to write off $10 billion all in one go. I'd have thought that either they would have had some inkling about it before last year or alternatively, the amount that could not be recovered would be spread over two or three years due to chasing people who failed to pay their mortgages, evicting them then selling the properties at a loss.

Anyone got any idea of the detail of this.

Also, I noticed that in the US in 2006 it was reported that mortgages reached 15% of GDP. I was curious and by my calculations it was 16.8% of GNP in Ireland in 2006. Seems like property may be sailing close to the wind over here too.

I think sub-prime probably won't take off in Ireland. It's too late and people are already getting cold feet. The time when people put their common sense in neutral and will do anything to get a loan, even if it's really expensive is probavbly over for this cycle. My thought is that the next step for Ireland will be a tightening of lending criteria so it'll get harder to get a loan.


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## amgd28 (21 Mar 2007)

CupofTea said:


> What's interesting is how HSBC found it needed to write off $10 billion all in one go. I'd have thought that either they would have had some inkling about it before last year or alternatively, the amount that could not be recovered would be spread over two or three years due to chasing people who failed to pay their mortgages, evicting them then selling the properties at a loss.
> 
> Anyone got any idea of the detail of this..



I haven't any information on this particular one, but I suggest they are employing an old tactic for dealing with news - when its good news, drip feed it out as the cumulative impact on share price is far better than giving the information in one go. The opposite is true of bad news - lump it all together in one go, take the hit and move on with a clean slate. The net impact on share price is less than if the bad news was a regular feature of investor reports from the company. Often called the 'big bucket' strategy


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## BrenG (21 Mar 2007)

There is no comparable sub-prime mortgage market in Ireland. A few institutions are offering high rate mortgages to those with les than perfect credit histories but they are limiting their risks by having fairly strict qualification criteria unlike the USA where a sales focus dominated over a risk perspective. A similar US collapse cost BofI dearly in New Hampshire back in the late 80's.


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## CupofTea (21 Mar 2007)

Any idea what this 'collapse' is? Seems to me that there must be something fundamentally different in the USA as compared with Ireland. Are the properties not secured, ficticious or something like that? Or is it just a normal property market crash with absconding borrowers and the lenders are having to write off a lot due to lower property prices and selling at a bad time?


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## BrenG (21 Mar 2007)

Some US banks took higher risks on mortgage lending in order to increase returns. Interest rates together with static/falling property prices resulted in high numbers of defaults. This resulted in high levels of bad debts and in some cases collapse of lending institutions. It should'nt happen here to the sasme degree but there are signs of problems in that area and some of the more bullish lending institutions in ireland could have major problems.


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## ClubMan (21 Mar 2007)

BrenG said:


> but there are signs of problems in that area and some of the more bullish lending institutions in ireland could have major problems.


What signs?


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## BrenG (21 Mar 2007)

Increase in interest rates. Slowdown in sales of residential property. Very high LTV ratios. One or two banks getting nervous on exposure levels and tightening up their credit criteria. It may not happen but as I said the signs are there


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## ClubMan (21 Mar 2007)

But it seems to me that you were talking about signs suggesting the following:


> high levels of bad debts and in some cases collapse of lending institutions.


 I haven't seen any financial institution (excluding stockbrokers!) collapsing in _Ireland _in a long time. Do you know that bad debts are rising?


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## BrenG (21 Mar 2007)

No. I do not see any financial institutions in ireland collapsing. Although if you go back just over 20 years AIB were in that position until the Government bailed them out. I am also not forecasting doom and gloom on the horizon but I do know for a fact of 2 financial institutions who are suffering because of an agressive lending policy. In my opinion we will see a change in the mortgage activities of banks in the near future.


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## Bronte (21 Mar 2007)

I remember the collapse in the AIB, I think it was an insurance division.  I always wonder did they ever have to pay the goverment back the bail out and if not why not?


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## ClubMan (21 Mar 2007)

BrenG said:


> I do know for a fact of 2 financial institutions who are suffering because of an agressive lending policy


Suffering in what way? Is this problem public knowledge that you can post to published links on it?


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## BrenG (21 Mar 2007)

No they never did pay the bilout. However all Banks were subjected to an excess tax charge to meet the cost to the Gov. As far as I now this excess was never rescinded so given the amount of time that has elapsed the tax has probably equalled the bailout amount by now. The insurance company in question was ICC.


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## conor_mc (21 Mar 2007)

ClubMan said:


> But it seems to me that you were talking about signs suggesting the following:


 
It's quite clear to me that he was referring to signs suggesting....



> some of the more bullish lending institutions in ireland could have major problems.


 
... which, as a matter of my own opinion (to which I have no published links), is quite conceivable. The comment about financial institutions collapsing was specific to the current situation in the U.S. market.


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## CupofTea (21 Mar 2007)

What we could really do with here is some quantitative data on repossessions in Ireland. The individual cases can be found on www.courts.ie under the High Court cases (or search for 'mortgage' ) but it would take a saint to collate all that information and keep it up to date.

I was in the UK during the last property crash in 1989/90. What was noticable was the way the adverts got bigger and bigger as the agents and brokers tried to compensate for the early stages of the downturn with increased advertising. 

In our local paper (Galway) there have been 5 and 6 page ads by agents for several months now and in the last couple of months I've started to see full page ads by mortgage brokers. My view is that is a sign that significant changes are afoot in the property market.


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## BrenG (21 Mar 2007)

You probably will not see any major rise in reposessions for some time after a problem arises. Generally with most financial institutions it would take a minimum of 12 months before the repossions hit as they will try to work out the problems before going the legal route. I agree that we are seing a change in this area and it will get worse before it gets better


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## Sunny (21 Mar 2007)

It is very difficult to compare the problems in the US sub prime market with the Irish mortgage market or any other European market with the exception of maybe the UK non-conforming mortgages. There is a big difference between an official sub-prime market and aggressive lending practices by banks. The potential collapse of the two financial institutions in the US is down to a liquidity crisis due to investment banks demanding that they buy back mortgages that they sold on and not having money to do so. (apparently a hedge fund has come to the rescue of one of them). Can't imagine BOI, AIB or IL&P in that situation. Not that I don't agree that a property crash wouldn't spell disaster for Irish Banks.


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## Dreamerb (23 Mar 2007)

CupofTea said:


> My thought is that the next step for Ireland will be a tightening of lending criteria so it'll get harder to get a loan.


 
This is already happening - not so much that it's harder to get a loan, but that the loan amounts being approved are reducing. This is because as the interest rates are rising, stress test of current rate plus about 2% is obviously eating further into disposable income. I'm aware of a couple of people going for new loan approvals where they've been approved for smaller amounts than initially (think it may have been mentioned on AAM as well, but don't recall for sure), on the basis that while other variables hadn't changed significantly, the stress test was yielding worse results. 

I also remember that when, last May or June, I was reducing the term of my then mortgage and overpaying significantly [largely to stress test ourselves for our new and bigger mortgage!], the person I was dealing with in the lending institution was surprised at what we were doing. He said that we were doing the exact opposite to most people he'd been dealing with recently: that large numbers of people were contacting them seeking to extend the terms of their mortgages, take interest-only periods, etc. That was either two or three (?) interest rate rises ago, and I suspect both that there are more people now finding themselves under pressure, and that some of the institutions must be looking rather nervously at their mortgage portfolios - particularly recent FTBs.

I don't think we have, in either prime or sub-prime lending sectors, the same degree of vulnerability that the US sub-prime sector had because there's much more extensive reliance here on income to service the loan, rather than asset appreciation providing better LTV collateral. But I do suspect that lenders here are probably going into very active management of the higher risk loans... very quietly! Their sources of funding, from securitisations for example, will either get a great deal more expensive or dry up if the financial markets perceive the mortgage market risks to have escalated significantly. [Part of the reason low LTV mortgages are often at better rates is that they're often lower risk as cash flow, and the backing asset is well insulated against market shocks, so they're ideal for securitisation as low-interest very secure bonds].

I'd love to see an assessment of the current mortgage lending sector, showing the loan-to-income trends over the last five years or so; LTV stats for FTBs over the same period; trends in loan duration, including where people are varying the term or remortgaging; and credit rating and tradable values of mortgage-secured bonds. I doubt it's possible to collate a great deal of that data, but it could make some very interesting, and revealing, reading!


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## Sunny (23 Mar 2007)

Just as as aside S&P put AIB on positive outlook today citing good credit controls, profitability etc. There didn't seem to much concern about the Irish mortgage market or AIB's lending practices. Of course whether you want to trust the rating agencies is another matter!


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## TTV (23 Mar 2007)

havent AIB stayed away from some of the riskier mortgages though like 100% etc..


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## conor_mc (23 Mar 2007)

Anecdotally, I think AIB have been one of the more responsible banks, relatively speaking.


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## Sunny (23 Mar 2007)

conor_mc said:


> Anecdotally, I think AIB have been one of the more responsible banks, relatively speaking.


 
Probably but with the gloom and doom that seems to be around these days, you would still expect to see something on their books considering the amount of second mortgages, equity releases etc. Announcing over €2bn in profits the other week would have been the perfect time to start provisioning for the bad times ahead but it didn't happen. I think I read that BOI are actually writing back loan loss provisions because they don't need them. Not saying that the Irish residential market isn't facing problems and I agree that there has to have been some irresponsible lending over the past few years and people are probably struggling but the main banks loan books seem to be standing up so far. Of course, we probably haven't seen the worst of it yet as unemployment is still low.


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