Negative Equity


J

Jeff

Hello

If house prices continue to fall then I imagine a lot of people could find
themselves in a negative equity position - especially given the silly
mortgages that were handed out over recent years. Sadly, my own son bought
his house just a year ago (against my advice) and it's probably already
worth less than his mortgage. I've been discussing this with him and he
feels that since he's hoping to move up the ladder, any property price falls
will work to his advantage. It's a while since I had a mortgage myself but
this doesn't sound quite right to me and I wondered if anyone could help
resolve the matter.

The problem as I see it is twofold. Firstly, if you have negative equity
then you'll be left with a debt after you've sold your house and this debt
will need to be added to any further mortgage you get - it will also count
against your income for such a mortgage. Secondly, in the new climate you'll
need to put down a much larger deposit as a fraction of the buying price. So
all in all, it looks to me like people in negative equity could find
themselves stuck in a falling market which they are unable to exploit.

Thanks for any comments
Jeff
 
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H

harry

I expect like everyone else he will be stuck there 'til things come
right with the economy. Who knows when that will be. Contemplating
any move upladder is foolish.
The real problem could arise if he gets to be unemployed.....
The best thing he can do is some judicious improvements to his
property if he can afford it.
 
J

Jonathan Bryce

Jeff said:
The problem as I see it is twofold. Firstly, if you have negative equity
then you'll be left with a debt after you've sold your house and this debt
will need to be added to any further mortgage you get - it will also count
against your income for such a mortgage. Secondly, in the new climate
you'll need to put down a much larger deposit as a fraction of the buying
price. So all in all, it looks to me like people in negative equity could
find themselves stuck in a falling market which they are unable to
exploit.
The bank won't release the charge until the mortgage is paid off, and you
won't be able to sell the house if you can't get the charge released.
 
T

Tim Woodall

The bank won't release the charge until the mortgage is paid off, and you
won't be able to sell the house if you can't get the charge released.
That's something I think might be different this time from the 80s
crash. I suspect that the banks might allow (or the government might
insist) that negative equity be moved to a new home so as to allow
people to move to jobs. However, I doubt that you will be allowed to
upsize.

Tim.
 
R

Ronald Raygun

Tim said:
That's something I think might be different this time from the 80s
crash. I suspect that the banks might allow (or the government might
insist) that negative equity be moved to a new home so as to allow
people to move to jobs. However, I doubt that you will be allowed to
upsize.
Why not? What if the new job is upsized (i.e. a promotion)?
What if your family upsizes? This isn't just a case of the
government advising people in negative equity to use condoms,
but one might already have children which were small enough
to share a bedroom but have grown to the stage at which
propriety demands they hav one each.

Of course, negative equity need not be a bar to moving. It may
prevent selling, and even if it didn't one might still not be
able to afford to buy again, but one doesn't have to sell and buy.
One can rent out and rent.
 
J

Jonathan Bryce

Tim said:
That's something I think might be different this time from the 80s
crash. I suspect that the banks might allow (or the government might
insist) that negative equity be moved to a new home so as to allow
people to move to jobs. However, I doubt that you will be allowed to
upsize.
Not so long ago, Northern Rock were lending up to 125% of the value of the
property. That doesn't happen any more. Now lenders want a pretty large
deposit.
 
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N

Nick

Tim said:
That's something I think might be different this time from the 80s
crash. I suspect that the banks might allow (or the government might
insist) that negative equity be moved to a new home so as to allow
people to move to jobs. However, I doubt that you will be allowed to
upsize.

Tim.
Cool, you think an extension of the practice of 100%+ mortgages is the
solution to our current woes.

For what is worth I was in negative equity in the 90's when I needed to
move. I saved up paid it off and rented for a few years until I had a
deposit for a mortgage on my current house.
 
T

Tim Woodall

Cool, you think an extension of the practice of 100%+ mortgages is the
solution to our current woes.
No. I think it's a least bad alternative. Forcing people to stay in the
same house when they cannot get a job until they get so far behind on
their payments that the house is reposessed so that they're then
eligible for taypayer handouts to pay for somewhere to live rather than
allowing them to find another job and move to it seems foolish to me.
For what is worth I was in negative equity in the 90's when I needed to
move. I saved up paid it off and rented for a few years until I had a
deposit for a mortgage on my current house.
Yes, and I know of people who early in the recession wanted to sell up
and rent because they couldn't really afford the mortgage and were
refused because there was a few thousand of borrowing they couldn't pay
off (They had an interested buyer who had made an offer). Three years
later, after redundancy, their house was reposessed with ten thousand
plus of negative equity. Rental income wouldn't have paid the mortgage
and they hadn't even got the money to put down a rental deposit to rent
somewhere else anyway.

I'm not really thinking about the people who got 100%+ mortgages, I'm
thinking of the people who had 75% LTV who after a 60% fall in house
prices have a 180% mortgage. There's no reason to suppose they won't
continue to be able to pay the mortgage but they may be forced to move,
expecially if companies are consolidating and their choice is redundancy
or moving to another office.

Tim.
 
N

Nick

Tim said:
No. I think it's a least bad alternative. Forcing people to stay in the
same house when they cannot get a job until they get so far behind on
their payments that the house is reposessed so that they're then
eligible for taypayer handouts to pay for somewhere to live rather than
allowing them to find another job and move to it seems foolish to me.
My view has always been that it is wrong to allow banks to pursue
mortgage holders for anything other than the mortgaged house. Many US
states still have this in law as a consequence of the great depression,
for many of the reasons you outline.

We do have a law which prevents gambling debts being pursued. It is
surprising this law is not extended to the biggest gamble most people take.

The Banks could easily adjust pricing to handle this option. One only
hopes that in future that auditors will make a little more effort to
understand how banks are valuing their mortgage contracts.
 
G

Graham Murray

Nick said:
We do have a law which prevents gambling debts being pursued. It is
surprising this law is not extended to the biggest gamble most people
take.
And as the stockmarket is just gambling by another name.....
 
N

Nick

Graham said:
And as the stockmarket is just gambling by another name.....
There is a difference between a person gambling with money they have and
gambling with money they don't have. There is also a difference between
economically sophisticated companies and banks gambling as compared to
the often naive individual.
 
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M

M Holmes

Jeff said:
If house prices continue to fall then I imagine a lot of people could find
themselves in a negative equity position
60,000 new homes every month apparently, and that's before all the
unemployment starts.
especially given the silly
mortgages that were handed out over recent years. Sadly, my own son bought
his house just a year ago (against my advice) and it's probably already
worth less than his mortgage. I've been discussing this with him and he
feels that since he's hoping to move up the ladder, any property price falls
will work to his advantage. It's a while since I had a mortgage myself but
this doesn't sound quite right to me and I wondered if anyone could help
resolve the matter.
The problem as I see it is twofold. Firstly, if you have negative equity
then you'll be left with a debt after you've sold your house and this debt
will need to be added to any further mortgage you get
That's if there's a bank that will do that. I suspect they may be more
worried about their own problems than taking on everyone else's
unsecured debt.
it will also count
against your income for such a mortgage.
Mortgage? He expects a mortgage? He should do standup.
Secondly, in the new climate you'll
need to put down a much larger deposit as a fraction of the buying
price.
I dunno about the timing, but we're headed back to minimum 25% deposits
and 2.5 times earnings, just like before the bubble started. Assuming of
course that after this, anybody wants a mortgage again.
So
all in all, it looks to me like people in negative equity could find
themselves stuck in a falling market which they are unable to exploit.
By far the most likely outcome. Unless of course Crash Gordon comes to
the rescue with more hundreds of billions of our money to bail all these
feckless individuals out of their stupidity.

FoFP
 
M

M Holmes

That's something I think might be different this time from the 80s
crash. I suspect that the banks might allow (or the government might
insist) that negative equity be moved to a new home so as to allow
people to move to jobs. However, I doubt that you will be allowed to
upsize.
That's something I expect too, at least to some degree. The problem is
that even if you can take your bad debt with you, it's still very expensive
to find all the transfer and moving costs when you have to pay cash for
them.

I suspect that most in negative equity will be staying put unless the
bank permits a transfer of unsecured debt *and* a new job pays all the
moving costs.

FoFP
 
M

M Holmes

Ronald Raygun said:
Of course, negative equity need not be a bar to moving. It may
prevent selling, and even if it didn't one might still not be
able to afford to buy again, but one doesn't have to sell and buy.
One can rent out and rent.
If the bank (which owns the property) permits it. I've a feeling that
many won't.

FoFP
 
R

Ronald Raygun

M said:
If the bank (which owns the property) permits it. I've a feeling that
many won't.
Banks do not "own the property"!

It would not be sensible for a bank to withhold permission, because
to do so would likely put them in a worse position.
 
M

M Holmes

Ronald Raygun said:
M Holmes wrote:
Banks do not "own the property"!
I'm not au fait with the legal wording, but the gist is that while you
have a loan out against the property, the bank can say what you can do
with the property. To me ownership is when it's yours to do with what
you want. certainly I wouldn't feel as if I owned something if I was owe
money on it.
It would not be sensible for a bank to withhold permission, because
to do so would likely put them in a worse position.
That depends on where the bank thinks things will go. Tenants don't have
the incentive to be as careful with property. If the bank thinks it will
end up a reposession, it wouldn't want it battered about by tenants
first. Then there's the issue that the sooner a reposession happens, the
less the negative equity outstandng after a sale.

FoFP
 
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T

Tim

M said:
I'm not au fait with the legal wording, but the gist is
that while you have a loan out against the property,
the bank can say what you can do with the property...
Only insofar as it's in the mortgage contract!

... To me ownership is when it's yours to do with what you want...
You'll *never* get that. The laws of the land restrict even a freeholder...
 
R

Ronald Raygun

M said:
I'm not au fait with the legal wording, but the gist is that while you
have a loan out against the property, the bank can say what you can do
with the property. To me ownership is when it's yours to do with what
you want. certainly I wouldn't feel as if I owned something if I was owe
money on it.
Suppose you owed no money on anything, and that amongst various assets
you owned there was one (call it item A (perhaps a house)) which was
suitable for securing a loan against, and that you (I use the term
"you" generically, since clearly you personally wouldn't dream of doing
this) did in fact borrow against item A in order to buy something else
(call it item B (perhaps a car or a boat)). Now, which of items A or
B would you consider you didn't "really" own?

You may think of it as a mere legal nicety, but just because you have
secured a loan against something, this doesn't mean you no longer
own it. You simply agreed to comply with certain conditions of the
loan. Hence why in the case of repossessions (in a positive equity
situation, where the borrower has failed to keep up payments) the
lender sells the house not as owner but on behalf of the owner, so
any money left over from the forced sale once the debt, interest,
and expenses have been discharged, the rest goes to the borrower.
If the borrower didn't *own* the property, the extra would go to
the lender, wouldn't it? The flip side of course is that in a
negative equity forced sale (where the excess is negative), the
lender doesn't just take it on the chin, but will pursue the owner
for the balance which he continues to owe despite having been thrown
out onto the street.
That depends on where the bank thinks things will go. Tenants don't have
the incentive to be as careful with property.
Well, there is that, which is why letting loans tend to have slightly
higher interest rates than "normal" loans. But this is also perhaps
because landlords embarking on a letting venture on a commercial basis
from the outset may be less bothered about looking after it (and making
sure their tenants look after it) to the same extent as when it's "their
home" they're letting out and are contemplating moving back into at some
stage.
If the bank thinks it will
end up a reposession, it wouldn't want it battered about by tenants
first.
If they're going to totally trash the place, that may influence them,
but slightly enhanced general wear and tear isn't going to affect the sale
proceeds by all that much, particularly at an auction sale.
Then there's the issue that the sooner a reposession happens, the
less the negative equity outstandng after a sale.
Well, the opposite is as likely. If the owner gets rent coming in,
it'll be more likely that he can keep up the repayments, which will
*increase* equity by reducing the loan balance.
 
M

M Holmes

Ronald Raygun said:
M Holmes wrote:
Suppose you owed no money on anything, and that amongst various assets
you owned there was one (call it item A (perhaps a house)) which was
suitable for securing a loan against, and that you (I use the term
"you" generically, since clearly you personally wouldn't dream of doing
this) did in fact borrow against item A in order to buy something else
(call it item B (perhaps a car or a boat)). Now, which of items A or
B would you consider you didn't "really" own?
At that point I wouldn't consider that I really owned either. As you
point out though, my views on debt are not mainstream. Though I expect
them to be substantially more mainstream by the time we're through
what's coming.
You may think of it as a mere legal nicety, but just because you have
secured a loan against something, this doesn't mean you no longer
own it. You simply agreed to comply with certain conditions of the
loan. Hence why in the case of repossessions (in a positive equity
situation, where the borrower has failed to keep up payments) the
lender sells the house not as owner but on behalf of the owner, so
any money left over from the forced sale once the debt, interest,
and expenses have been discharged, the rest goes to the borrower.
I think that's quite fair.
If the borrower didn't *own* the property, the extra would go to
the lender, wouldn't it? The flip side of course is that in a
negative equity forced sale (where the excess is negative), the
lender doesn't just take it on the chin, but will pursue the owner
for the balance which he continues to owe despite having been thrown
out onto the street.
That's fair too.
Well, there is that, which is why letting loans tend to have slightly
higher interest rates than "normal" loans. But this is also perhaps
because landlords embarking on a letting venture on a commercial basis
from the outset may be less bothered about looking after it (and making
sure their tenants look after it) to the same extent as when it's "their
home" they're letting out and are contemplating moving back into at some
stage.
Then surely if someone plans to "let to let" as you say, the bank would
need to know to increase the interest rate on the loan? (assuming it
would go along with the plan at all).
If they're going to totally trash the place, that may influence them,
but slightly enhanced general wear and tear isn't going to affect the sale
proceeds by all that much, particularly at an auction sale.
It will be interesting to observe how the banks deal with such solutions
as they're offered them.
Well, the opposite is as likely. If the owner gets rent coming in,
it'll be more likely that he can keep up the repayments, which will
*increase* equity by reducing the loan balance.
Unless we're in a deflation which causes rents to decline.

I agree with the substance of your argument though: there are many
factors to be weighed against each other when looking at it from a
bank's point of view.

FoFP
 
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N

Nebulous

Ronald Raygun said:
Suppose you owed no money on anything, and that amongst various assets
you owned there was one (call it item A (perhaps a house)) which was
suitable for securing a loan against, and that you (I use the term
"you" generically, since clearly you personally wouldn't dream of doing
this) did in fact borrow against item A in order to buy something else
(call it item B (perhaps a car or a boat)). Now, which of items A or
B would you consider you didn't "really" own?

You may think of it as a mere legal nicety, but just because you have
secured a loan against something, this doesn't mean you no longer
own it. You simply agreed to comply with certain conditions of the
loan. Hence why in the case of repossessions (in a positive equity
situation, where the borrower has failed to keep up payments) the
lender sells the house not as owner but on behalf of the owner, so
any money left over from the forced sale once the debt, interest,
and expenses have been discharged, the rest goes to the borrower.
If the borrower didn't *own* the property, the extra would go to
the lender, wouldn't it? The flip side of course is that in a
negative equity forced sale (where the excess is negative), the
lender doesn't just take it on the chin, but will pursue the owner
for the balance which he continues to owe despite having been thrown
out onto the street.
How did the Americans get into a position where they have no-recourse loans
and we don't?

Was it a regulatory thing or did somebody offer it and all the rest felt
they had to do the same to match it?

Neb
 

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