Alternative Financing for the Property Market?

Wanderer78

schmittel wrote: »

I'm not talking about the wild west. There would still be regulation in terms of capital reserves and rules about stress testing etc.

The pushback on this seems to be that lenders will revert to type and engage in widespread reckless lending, but what I am suggesting is trying to create a system that encourages prudent lending, and if not, it is private capital that takes the hit rather than the taxpayer.

This should not be impossible to achieve.

You think the current system is better?

Economy in lockdown, fears of a significant recession, almost half the labor force on some sort of government financial support - prompting AIB to take stock::



Great, seems sensible.

Cue public outcry. Having berated the banks for years for reckless lending, everyone gets on their high horse about prudent lending. Predictably enough politicians step up to the plate, incuding Michael McGrath, Minister for Public Expenditure:



So the banks refused loans for the mere fact that borrowers were on a temporary from of social welfare.

Shortly after the Government discussed the issue AIB said they would reopen applications to those on the wage subsidy scheme.

This is banking by public opinion, and if it goes tits up, the taxpayers are on the hook again.

Nobody can blame the banks this time, they can say "We told you it was madness, but the government said keep lending!"

you re making some really good points, im disturbed by how much we seemed to have forgotten in just a few years, we need to be extremely careful when it comes to banking activities, its clearly obvious these systems and processes are extremely vulnerable and sensitive to economic conditions, debt serviceability is critical to their stability, when that fails, all bets are off! im disturbed by how our government has been trying to encourage private sector lending, how???? capacity simply isnt there, the private sector is contracting, and rapidly. the money supply has to be pushed into the public domain, for pure safety reasons, to protect every element of the economy, in particular the financial sector.

Timing belt

schmittel wrote: »

I'm not talking about the wild west. There would still be regulation in terms of capital reserves and rules about stress testing etc.

The pushback on this seems to be that lenders will revert to type and engage in widespread reckless lending, but what I am suggesting is trying to create a system that encourages prudent lending, and if not, it is private capital that takes the hit rather than the taxpayer.

This should not be impossible to achieve.

You think the current system is better?

Economy in lockdown, fears of a significant recession, almost half the labor force on some sort of government financial support - prompting AIB to take stock::



Great, seems sensible.

Cue public outcry. Having berated the banks for years for reckless lending, everyone gets on their high horse about prudent lending. Predictably enough politicians step up to the plate, incuding Michael McGrath, Minister for Public Expenditure:



So the banks refused loans for the mere fact that borrowers were on a temporary from of social welfare.

Shortly after the Government discussed the issue AIB said they would reopen applications to those on the wage subsidy scheme.

This is banking by public opinion, and if it goes tits up, the taxpayers are on the hook again.

Nobody can blame the banks this time, they can say "We told you it was madness, but the government said keep lending!"

The reason for the political interference was that the capital buffers were relaxed and other changes that would require banks to hold more capital that were due to be implemented in 2020 But we’re push backed a year or so. Both of these changes were done to make sure banks continued to lend to avoid a credit crunch like we saw in the 2008 crisis.

AIB got called out as it looked like it was not going to lend despite the reduced capital requirement and instead was going to pay a dividend to its shareholders.

Claw Hammer

Timing belt wrote: »

The reason for the political interference was that the capital buffers were relaxed and other changes that would require banks to hold more capital that were due to be implemented in 2020 But we’re push backed a year or so. Both of these changes were done to make sure banks continued to lend to avoid a credit crunch like we saw in the 2008 crisis.

AIB got called out as it looked like it was not going to lend despite the reduced capital requirement and instead was going to pay a dividend to its shareholders.

The banks are masters that saying that there are going to lend but in reality they find excuses not to release the funds at some point or other. The banks have been getting more money in from repayments on mortgages than they've been lending out. This has been going on for quite some time. The banks quote figures about how much lending they have approved but are much more coy about saying how much they are actually allowed to be drawn down which is often a lot less.

Wanderer78

Claw Hammer wrote: »

The banks are masters that saying that there are going to lend but in reality they find excuses not to release the funds at some point or other. The banks have been getting more money in from repayments on mortgages than they've been lending out. This has been going on for quite some time. The banks quote figures about how much lending they have approved but are much more coy about saying how much they are actually allowed to be drawn down which is often a lot less.

its important to remember though, as debts are paid off, it is in fact, the effective destruction of the original credit it was based on

hometruths

Timing belt wrote: »

The reason for the political interference was that the capital buffers were relaxed and other changes that would require banks to hold more capital that were due to be implemented in 2020 But we’re push backed a year or so. Both of these changes were done to make sure banks continued to lend to avoid a credit crunch like we saw in the 2008 crisis.

AIB got called out as it looked like it was not going to lend despite the reduced capital requirement and instead was going to pay a dividend to its shareholders.

So let me see if I understand this.

We cannot relax the rules for mortgage lending because we are worried to that they will lend too much.

But when rules around capital reserves were relaxed we were worried that the banks would not lend enough.

Would almost make you feel sorry for the banks, they can't win.

Timing belt

schmittel wrote: »

So let me see if I understand this.

We cannot relax the rules for mortgage lending because we are worried to that they will lend too much.

But when rules around capital reserves were relaxed we were worried that the banks would not lend enough.

Would almost make you feel sorry for the banks, they can't win.

The capital reserves that got relaxed are designed to be high during good years so a bank has enough capital and then reduced during a recession/shock to give banks room to continue lending.

What some banks tried to do was pull a fast one by using this extra capital to pay dividends that they would not otherwise be able to pay instead of lending.

Regulation is needed as any loop hole will be exploited. Have a look at the ‘China hustle’ on Netflix It is a good example

hometruths

Timing belt wrote: »

The capital reserves that got relaxed are designed to be high during good years so a bank has enough capital and then reduced during a recession/shock to give banks room to continue lending.

What some banks tried to do was pull a fast one by using this extra capital to pay dividends that they would not otherwise be able to pay instead of lending.

Regulation is needed as any loop hole will be exploited. Have a look at the ‘China hustle’ on Netflix It is a good example

OK so in bad times with a recession and high unemployment looming we want the banks to issue new mortgages to those who are most likely to lose their jobs?

Have I got it right now?

Wanderer78

schmittel wrote: »

OK so in bad times with a recession and high unemployment looming we want the banks to issue new mortgages to those who are most likely to lose their jobs?

Have I got it right now?

of course not, its to try encourage loaning to those that have the ability to pay it back, including businesses

hometruths

Wanderer78 wrote: »

of course not, its to try encourage loaning to those that have the ability to pay it back, including businesses

Yes but my post on AIBs prudent lending was specifically about their announcement concerning refusing mortgage applications to those on wage subsidy scheme.

Timing belt appears to be saying that I've misunderstood this, amidst some nonsense about dividends.

Timing belt

schmittel wrote: »

OK so in bad times with a recession and high unemployment looming we want the banks to issue new mortgages to those who are most likely to lose their jobs?

Have I got it right now?

They last thing you want is for banks to stop lending and pull credit lines to good/sound business /individuals causing a liquidity problem and putting them out of business. Which is what happened previously.

Wanderer78

schmittel wrote: »

Yes but my post on AIBs prudent lending was specifically about their announcement concerning refusing mortgage applications to those on wage subsidy scheme.

Timing belt appears to be saying that I've misunderstood this, amidst some nonsense about dividends.

theres nothing nonsense about timing belts knowledge on this matter, their understanding is exceptional, its far better than mine. banks are effectively risk managers, and obviously right now, its an exceptionally risky time to loan credit, but funnily enough, increasing the money supply is critical right now via credit creation, so theres a conflict of interest, for everyone really

hometruths

Timing belt wrote: »

They last thing you want is for banks to stop lending and pull credit lines to good/sound business /individuals causing a liquidity problem and putting them out of business. Which is what happened previously.

Yes agreed.

But would you agree that the banks were right to stop lending to those on wage subsidy scheme?

Timing belt

schmittel wrote: »

Yes but my post on AIBs prudent lending was specifically about their announcement concerning refusing mortgage applications to those on wage subsidy scheme.

Timing belt appears to be saying that I've misunderstood this, amidst some nonsense about dividends.

What I was saying was banks will try and pull a fast one wherever they can. E.g. by paying a dividend to get share price up instead of lending when the buffer got reduced.

The bank still sets its own risk appetite and can lend to whoever they deem fit (within certain rules). If the shareholders don’t agree they get rid of board of directors and appoint new ones. The biggest shareholder is the Irish gov.

Timing belt

schmittel wrote: »

Yes agreed.

But would you agree that the banks were right to stop lending to those on wage subsidy scheme?

It depends on what type of lending? Pull overdraft facilities no, small personal loans to get over crisis no (assuming individual had a good credit history etc).

Stop mortgages already approved no as this would freeze the property market and bank would loose out long term by doing so.

New mortgage yes they would need to access future risks. And I think you will find that this is what happened in reality regardless of any political grand standing.

hometruths

Timing belt wrote: »

What I was saying was banks will try and pull a fast one wherever they can. E.g. by paying a dividend to get share price up instead of lending when the buffer got reduced.

In fairness, you said the political interference re the wage subsidy scheme was specifically because AIB were intending to pay a dividend:

Timing belt wrote: »

The reason for the political interference was that the capital buffers were relaxed and other changes that would require banks to hold more capital that were due to be implemented in 2020 But we’re push backed a year or so. Both of these changes were done to make sure banks continued to lend to avoid a credit crunch like we saw in the 2008 crisis.

AIB got called out as it looked like it was not going to lend despite the reduced capital requirement and instead was going to pay a dividend to its shareholders.

And then repeated it.

Timing belt wrote: »

What some banks tried to do was pull a fast one by using this extra capital to pay dividends that they would not otherwise be able to pay instead of lending.

But as I recall, AIB (and the other banks) announced they were scrapping their dividends in late March, shortly after the ECB 'recommended' they do so.

The political interference occurred in late June.

Have I got this wrong on the dividend? Where did you read/hear they were planning to pay a dividend?

If my recollection is correct, then to be fair, you're talking nonsense about dividends!

If not, apologies. I must have missed it.

hometruths

Timing belt wrote: »

It depends on what type of lending? Pull overdraft facilities no, small personal loans to get over crisis no (assuming individual had a good credit history etc).

Stop mortgages already approved no as this would freeze the property market and bank would loose out long term by doing so.

New mortgage yes they would need to access future risks. And I think you will find that this is what happened in reality regardless of any political grand standing.

Specifically my post was about mortgages. Banks were being prudent about mortgages and public opinion and politicians got on their case to encourage a less prudent approach - or reckless lending to put it another way.

Timing belt

schmittel wrote: »

In fairness, you said the political interference re the wage subsidy scheme was specifically because AIB were intending to pay a dividend:



And then repeated it.



But as I recall, AIB (and the other banks) announced they were scrapping their dividends in late March, shortly after the ECB 'recommended' they do so.

The political interference occurred in late June.

Have I got this wrong on the dividend? Where did you read/hear they were planning to pay a dividend?

If my recollection is correct, then to be fair, you're talking nonsense about dividends!

If not, apologies. I must have missed it.

At the time of the announcement there was a lot of talk about dividends being paid out to help boost the share price and make it easier for banks to get new capital. This lead to the ECB coming out in July to extend the ban on dividends.
https://www.rte.ie/news/business/2020/0728/1156046-ecb-on-bank-dividends/

This issue will raise it's head again over the coming months and will probably start after the banks release there Q3 results at the end of the month when it comes to light that they have over provided for losses.

hometruths

Timing belt wrote: »

At the time of the announcement there was a lot of talk about dividends being paid out to help boost the share price and make it easier for banks to get new capital. This lead to the ECB coming out in July to extend the ban on dividends.
https://www.rte.ie/news/business/2020/0728/1156046-ecb-on-bank-dividends/

This issue will raise it's head again over the coming months and will probably start after the banks release there Q3 results at the end of the month when it comes to light that they have over provided for losses.

Seems legit.

Timing belt

schmittel wrote: »

Specifically my post was about mortgages. Banks were being prudent about mortgages and public opinion and politicians got on their case to encourage a less prudent approach - or reckless lending to put it another way.

The whole monetary policy of the EU is encouraging banks to take on more risks when they pump liquidity into the system. This is done to encourage lending but in reality this does not happen as the banks are maxed out their lending (within their current risk appetite). Instead the excess funds ends back with the ECB in the banks deposit account with them attracting a negative interest rate and generating a loss to the banks.

If you look at mortgage lending for the past 10 years it has been reducing year on year despite cheap credit available.

hometruths

Timing belt wrote: »

The whole monetary policy of the EU is encouraging banks to take on more risks when they pump liquidity into the system. This is done to encourage lending but in reality this does not happen as the banks are maxed out their lending (within their current risk appetite). Instead the excess funds ends back with the ECB in the banks deposit account with them attracting a negative interest rate and generating a loss to the banks.

If you look at mortgage lending for the past 10 years it has been reducing year on year despite cheap credit available.

Yes agreed.

But surely this backs up the theory that banks can handle their own risk appetite and we don't need to police it with CB lending limits?

Timing belt

schmittel wrote: »

Yes agreed.

But surely this backs up the theory that banks can handle their own risk appetite and we don't need to police it with CB lending limits?

I would like to say yes but if you look at the financial stability reports from the ECB or any of the rating agencies papers on bank lending and you will see that EU countries that do not have a Loan to income cap or a loan to value cap were lowering there risk appetite and increasing lending to more risky mortgages which was leading to property bubbles building up in those countries.

hometruths

Timing belt wrote: »

I would like to say yes but if you look at the financial stability reports from the ECB or any of the rating agencies papers on bank lending and you will see that EU countries that do not have a Loan to income cap or a loan to value cap were lowering there risk appetite and increasing lending to more risky mortgages which was leading to property bubbles building up in those countries.

So they are doing wha the ECB wants them to do? Increase lending?

Do you have a quick link to some of this stuff?

Timing belt

schmittel wrote: »

So they are doing wha the ECB wants them to do? Increase lending?

Do you have a quick link to some of this stuff?

https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr202005~1b75555f66.en.html#toc7 (See Chart 5 for the housing market)


https://www.ecb.europa.eu/pub/financial-stability/fsr/special/html/ecb.fsrart202005_01~762d09d7a2.en.html#toc3

Timing belt

schmittel wrote: »

So they are doing wha the ECB wants them to do? Increase lending?

Yes but most of this lending is not going into the housing market via mortgages and instead is going into funds which in turn is leading to asset bubbles in the stock market, Commercial real estate, and the housing market via funds buying BTL stock.

If the ECB pull back on this then bond yields will rise for governments making it more difficult to service the debt and will lead to another sovereign crisis.

It is a vicious circle that can only go on so long till somethings goes pop and why you are seeing investors moving into precious metals to hedge against a crash.

hometruths

Timing belt wrote: »

https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr202005~1b75555f66.en.html#toc7 (See Chart 5 for the housing market)


https://www.ecb.europa.eu/pub/financial-stability/fsr/special/html/ecb.fsrart202005_01~762d09d7a2.en.html#toc3

Headed straight for chart 5.



Can you spell this out for me? Struggling to understand the significance of that left hand chart.

Are you saying that Greece, Cyprus and Slovakia have been "increasing lending to more risky mortgages which was leading to property bubbles building up in those countries."

hometruths

Timing belt wrote: »

Yes but most of this lending is not going into the housing market via mortgages and instead is going into funds which in turn is leading to asset bubbles in the stock market, Commercial real estate, and the housing market via funds buying BTL stock.

If the ECB pull back on this then bond yields will rise for governments making it more difficult to service the debt and will lead to another sovereign crisis.

It is a vicious circle that can only go on so long till somethings goes pop and why you are seeing investors moving into precious metals to hedge against a crash.

Yes agree with all that 100%.

Which again supports the theory that removing CB lending limits on mortgages is not going to unleash hell.

Timing belt

schmittel wrote: »

Yes agree with all that 100%.

Which again supports the theory that removing CB lending limits on mortgages is not going to unleash hell.

The next move will be for the Bank of England to go negative with rates in Jan/Feb. (If you look at the yield curve you can see the market has already priced this with neg yields) Once the BOE introduce negative rates the ECB will put pressure on the banks to pass on the negative rates to the retail customers which will generate inflation as people will spend rather than leave there cash in the bank. This should work as long as retail customers do not add to the already over populated asset bubbles by investing in the stock market or property and instead spend in the real economy.

Wanderer78

Timing belt wrote:

The next move will be for the Bank of England to go negative with rates in Jan/Feb. (If you look at the yield curve you can see the market has already priced this with neg yields) Once the BOE introduce negative rates the ECB will put pressure on the banks to pass on the negative rates to the retail customers which will generate inflation as people will spend rather than leave there cash in the bank. This should work as long as retail customers do not add to the already over populated asset bubbles by investing in the stock market or property and instead spend in the real economy.

What happens if people don't spend?

Timing belt

schmittel wrote: »

Headed straight for chart 5.



Can you spell this out for me? Struggling to understand the significance of that left hand chart.

Are you saying that Greece, Cyprus and Slovakia have been "increasing lending to more risky mortgages which was leading to property bubbles building up in those countries."

This is just showing you where the bubbles are in relation to the unemployment rate (x Axis) and the overvaluation on the (y axis)

The second link address the deterioration in lending standards in more detail as it is specifically about property.

Timing belt

Wanderer78 wrote: »

What happens if people don't spend?

Then we don't see any inflation and government will continue with QE to stimulate the economies until they max it out and the credit markets start turning on the sovereign's and picking them off one by one.