Shock horrors from CityWire:
State-backed lender Lloyds (LLOY.L) will be the ‘most exposed’ of UK banks if house prices in Britain fall a further 10%, as Morgan Stanley expects them to, the investment bank said in a report today...
Noting that 54% of Lloyds’ loan book is in UK mortgages (£341 billion at 10 December), Morgan Stanley's analysts forecasted that 27% (£90 billion) of these loans would be in negative equity by December next year.
Ho hum.
Just because a loan is in nequity does not mean much in itself, let's assume that a quarter of all Lloyds' mortgages are a hundred per cent loan-to-value as at today's date and house prices fall a further ten per cent. The bits of those loans which are then no longer secured on land and buildings is only ten per cent of face value of those loans, i.e. out of a loan book of £631 billion (£341 billion ÷ 54%), £9 billion (one-and-a-half per cent by value) can be shuffled from 'secured' to 'unsecured', and a commensurately higher rate of interest charged (let's say over 10% per annum).
Wednesday 1 June 2011
Lloyds ‘not particularly exposed’ to further house price falls
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But their chart showing the feeback loops leading to a double dip in house prices is worth a look
http://ftalphaville.ft.com/blog/2011/06/01/581341/uk-house-price-gloom/
OTOH, well yeah but no but. Their 10% fall is the end result of that feedback loop. Either way, are we bovvered?
10% price fall -> 1.5% of loans unsecured.
25% price fall -> about 6.25%* of loans unsecured (for all banks).
6.25% loan write-off -> nothing that a debt-for-equity swap and/or higher interest rates can't cope with.
* Assuming straight line distribution of LTV's from 1% to 100%.
The bits of those loans which are then no longer secured on land and buildings is only ten per cent of face value of those loans
What - by law is it?
JH, it's not the man-made law, it's maths (a much higher law).
If I lend you £100 to buy a £150 house, that loan is more than a hundred per cent secured. If the house falls in value to £90, then ninety per cent of the loan is secured on the house and £10 is only secured on your personal willingness and ability to pay.
Surely it is number of defaults rather than actual negative equity is the key thing for a bank (although these are probably well correlated). The last thing a speculator wants is to have to actually take delivery and off-load the goods.
DNAse: "Surely it is number of defaults..."
It's total losses, i.e. cash received minus cash advanced which matter. Out of that theoretical 1.5% unsecured. liable at higher interest rates, what will total losses be?
If they can charge 2% extra interest on loans in partial nequity for a three years and lose two-thirds of the unsecured bit, they have still more or less broken even. The idea that UK banks are anywhere close to being in danger is nonsensical.
Morgan Stanley (the investment bankers) seem to be missing something here.
Lloyds got stung a couple of years back, and after taking over HBOS they have a huge exposure to property loans on their books.
There is no way in hell they still have an open exposure to their full book. They'll either have puts in place which kick in if the index goes down below a certain level (thus they'd be in the money) and swaptions to cover the loss of interest.
Investment banks will gladly take the premium in this market as the outlook is for static or rising pricings over the coming years...and Lloyds wouldn't call them in anyway (or noone would deal with them again).
So if house prices do fall another 10%, don't expect such a huge loss....that follows on from your point too, which doesn't necessarily mean it's all a loss anyhoo
JQ, indeed, there will loads of stuff behind the scenes as well, which might make things worse or better, but I think we can assume that Morgan Stanley have their own finger in the pie somehow.
For example, maybe MS are trying to screw higher insurance premiums out of Lloyds, or possibly trying to push down Lloyds share price to be able to make a profit on some short selling or whatever, or just stampede the UK government into giving MS a fat fee for sorting out a non-existent problem.
I think you might be on to something. They may even have been approached by UKFI to underwrite the placing!
JQ, t'was you who opened this rather interesting line of enquiry :-)
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