Wednesday, 31 July 2013

Reader's Letter Of The Day

From the FT:

Please tell me this is a joke


"The government will guarantee a proportion of the home loan as an insurance policy for the banks" (Cable warns of Help to Buy house price bubble", July 29) – are you kidding me?

Tim Mercer, Head of Business and Economics, The Ashcombe School, UK.


Derek said...

This is exactly what is done in Canada. Check out the CMHC, Canada Mortgage and Housing Corporation, a Crown corporation. It's not a good thing.

Dinero said...

Hi Mark

I think one way of looking at the bank security issue is this -

80% of the collaterall used in the mortgage market is an illusion created by the way accounting is done in the mortgage market. People buy houses with 20% savings and 80% credit , therefore 80% of the price of the houses that are used as colateral for loans, is generated by the credit that the loans themselves generate. And that contradicts the purpose of collateral, which is to provide something that has value, independant of the loan transaction.

Kj said...

Derek: It's crazy indeed. If anything it ought to be te other way around; private, high-risk loans for the top-financing, cheap crown corporation loans for the bulk.

ThomasBHall said...

We all know this will work really really well- in other news Mark- why not skip the security of the "real-estate" and securitise the income stream. A new financial product that does just that appears to be in the works from some of our brightest minds...

Mark Wadsworth said...

D, that is weird.

"Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation, of the Government of Canada, founded after World War II to provide housing for returning soldiers"

Well hooray for more housing for returning soldiers and everything, hooray for more housing generally, but did Canada lose much housing to German bombs during WW2? Where were the soldiers living beforehand?

Din, that is spot on, that is exactly how it works.

In reality, the loan is secured on the likelihood that the borrower will have the income to pay off the loan+interest in future, and if he can't, then on the likelihood that some other mug will come along and take out another mortgage to buy it off him etc.

The bank just holds the land as a hostage to force the borrower to pay up.

Kj, exactly.

TBH, like we've always said, the banks just collect rent, this cunning scheme just states that openly.