# Bank Response to Current Situation



## BrenG (20 Mar 2007)

I know that there has been general discussion on this topic on other threads but I would be interested to hear some debate on the key issue of how the Banks will respond to the increased risk levels represented by a static/falling property market and higher interest rates.

Mortgage lending has been increasing by approx 33% annually over the past 4 years. An increasing portion of this rise has been the tendandcy of home owners to use equity release funding to cover shortfalls in discretionary personal spending such as holidays, new cars etc. In other words a larger portion of the population have been "lunching out" on their house. i.e. eating the equity.

I am old enough to have been involved in the banking crisis of the mid 80's when farming took a major hit and farmland prices hit a major low. The reaction of the banks was neither considered nor measured. They had no anticipation of the crisis and effectively panicked shutting up on new lending and agressively chasing defaulters.

My view is that none of todays bankers have learned any lessons from that time and are still riding on the wave that a crisis will never happen. Maybe they are right but if it does my view is that the Banks will again all act like lemmings and rather than taking a stance of controlled response we will see a panic situation which will effectively close down the easy credit option for the normal punter. Now instead of lunching on the family home many individuals will find the option closed and payback time will mean that repayment problems will quickly arise and create further panic with the banks. I may of course be completely wrong but I do see many of the signs now that were there in the eary 80's. Hopefully it won't happen.


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## Riddler (20 Mar 2007)

Brendan

You are correct as the 80’s did see a farm land price bubble due to euphoric lemming like lending followed by a credit crunch. But there were other factors such as poor economic performance, low levels of after tax income etc. 

Are we seeing early warning signs of problems ahead. I think you are right. The real problem is not with secured lending ie mortgages but with unsecured consumer lending which is of course seen by borrowers as “discretionary” when they get into difficulties.

Take for example the emerging bad debt problem in credit unions and their €7bn of unsecured consumer credit. We know from a recent Genworth report that thousands of first time mortgagees have borrowed the 10% from their credit union and more to finance furniture (flat screen TV’s) etc. We also know that the level of credit union bad debts is very high even by credit union standards. Are the original sub prime lenders feeling the squeeze and this is a lead indicator of big problems emerging. 

We are beginning to see the very top of an iceberg appear over the consumer loan horizon. 

Will there be a second credit crunch ….I don’t think so. I do believe that Banks have sophisticated credit scoring which will allow them to price for risk …which means the “one price for all” will go and be replaced with a low price for good credit risk and a higher price for poorer risks. 

Riddler


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## Duplex (20 Mar 2007)

Riddler said:


> Will there be a second credit crunch ….I don’t think so. I do believe that Banks have sophisticated credit scoring which will allow them to price for risk …which means the “one price for all” will go and be replaced with a low price for good credit risk and a higher price for poorer risks.
> 
> Riddler



Would that be the same sophisticated credit scoring system that American Banks employ (well employed after the regulators and the lawyers get at them)


http://www.mortgageimplode.com/


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## KalEl (20 Mar 2007)

Duplex said:


> Would that be the same sophisticated credit scoring system that American Banks employ (well employed after the regulators and the lawyers get at them)
> 
> 
> http://www.mortgageimplode.com/


 
That's not really comparing like with like. The subprime lending sector is the source of the latest problems in the US...this is not replicated here. Well, not yet!


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## hmmm (20 Mar 2007)

Sub Prime mortgages in the US are similar to many of our so called "prime" mortgages - loans with excessive salary to loan amounts, 100% interest only, "BTL" mortgages, loans with reduced initial periods. I wouldn't be so confident.


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## KalEl (20 Mar 2007)

hmmm said:


> Sub Prime mortgages in the US are similar to many of our so called "prime" mortgages - loans with excessive salary to loan amounts, 100% interest only, "BTL" mortgages, loans with reduced initial periods. I wouldn't be so confident.


 
You're not wrong there! But sub-prime is more like Ocean Finance type stuff, bad credit histories-that sort of thing.


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## room305 (20 Mar 2007)

Riddler said:


> Will there be a second credit crunch ….I don’t think so. I do believe that Banks have sophisticated credit scoring which will allow them to price for risk …which means the “one price for all” will go and be replaced with a low price for good credit risk and a higher price for poorer risks.



It's not so much about sophisticated credit scoring systems but the ability to securitize and sell on tranches of credit to hedge funds and pension funds. By spreading the risk among multiple parties the risk is in no way eliminated but it allows banks to behave as though it is.


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## Remix (21 Mar 2007)

It's interesting how [broken link removed]describes the "game" in the US. 

The exit strategy for the person at the lowest level of the games depends on _someone-will-buy-it-from-me-at-a-higher-price_. 

And this "someone" must raise even more funds from the bank to pay the higher price. And so (it was hoped by all participants) the process would continue...

(I've added line breaks for legibility)



> The bankers who sign the checks,
> the appraisers who value the property,
> the retiree who speculates on the property,
> the investment bank that pools the mortgages and tranches them,
> ...


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