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Developer Sub Prime threatens Banks

mairteenpak

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Apr 21, 2008
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The rock that will smash one or more of the Banks will not be the Credit Crunch nor the American Sub Prime, it will be Developer Sub Prime.

Developer Sub prime are lending advances, to Developers on Development Lands on high LTVs, on over optimistic valuations of Future property price and price growth, to individuals whose repayment capacity is linked to a perpetual appreciation of the property market.

To Date the peak paper values in the market are sustaining roll overs of interest,simply because there is neither income nor cash flow to make interest payments.

The Value of the land banks fall while the amount borrowed against them increases. The dealing cost on acquisition of development land is 9% plus fees so even to break even after a year you need to sell for 116% to 122% of the purchase price to cover Stamp Duty and interest from 7% to 12%

The Nature of Development Land price increase and decrease is such that because of the relatively fixed nature of the construction cost the land price takes the pain or the gain on any price movement.

The only salvation for Land Banks with high levels of borrowing would be inflation out striping the cost of borrowing for a number of years, but even that is a forlorn hope.

From the peak of the boom to the trough of land value that in my opinion has yet to come probably after 2009, as the banks will play chicken with the recession for another while, the value of the National Land Bank will probably decline by 50 Billion to a 100 billion.

The strange contradiction at the moment is that banks and valuers and owners are maintaining that the land retains its peak value while the borrowing on the lands increase. At the same time no one is buying as there is no finance to buy. ( The banks dont think its worth the peak value or the half of it if you are buying)

Even if prices stood still highly borrowed developers would still make a loss as the cost of dealing and interest would require appreciation of 16% to 22% just to break even.

Banks are lending huge multiples of their own capital up to 15 times.

What would happen to a bank if it lost 50% of its capital?
 


Anorakphobia

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Apr 13, 2007
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911
Re: Developer SubPrime

Have a look at today's IT prop section.
Truth has finally arrived.
Numerous properties marked down by over 50% from the peak.

And still we let the like of Dan mc Laughlin on our airwaves ands say unchallenged that the drop from peak is just 15%.
Still we let Permo/TSB tell us the drop this year is just 5.2%.

We had freedomlover at his imbecilic best telling us just days ago that the 60% fall in our stock market was almost irrelevant, just spivs and chancers bad mouthing and shorting stocks.
It wasn't. It was astute foreign investors looking in from the outside and seeing how out of control the whole thing had got and they moved in their billions.
They gambled that a 50% property crash was imminent and if arrived would likely incinerate our banking institutions.
Well guess what, they were right on the property crash, all that remains to be seen is whther the effect on our financial institutions will be as dire as they have gambled it will be.
 

mairteenpak

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Apr 21, 2008
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Re: Developer SubPrime

A 50% crash would wipe every Irish Bank out of existence.

No having a go, but do you expect the financial Institutions and their Crystal ball gazers, to admit to anything more than the most minimal fall in value. To do otherwise would be like burning their deposits.

It is a little like watching a duckling swimming. From above (outside) all is calm while from below ( inside) the legs are paddling furiously.

Banking is a confidence trick and the crystal ball gazers, are merely doing what they are paid to do, spin and spin, and pretend that they can see the magic clothes. You can't blame them, its their nature, just as it is the nature of a carnivore to eat meat.

It is a little like playing texas holdem the lads will only play when they have to cover the big or small blinds, and will wait it out hoping for the royal flush, to go all in.
 

HarshBuzz

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Re: Developer SubPrime

mairteenpak said:
Banking is a confidence trick and the crystal ball gazers, are merely doing what they are paid to do, spin and spin, and pretend that they can see the magic clothes. You can't blame them, its their nature, just as it is the nature of a carnivore to eat meat.
I attended a meeting with some representatives of one our local leading institutions yesterday and the level of denial was truly frightening.

When we discussed the propspects for our local economy and, more specifically our banking sector, they just kept repeating 'international factors', ' we have no sub-prime here in Ireland', 'share price falls completely overdone' with vacant smiles adorning their faces as they inwardly contemplated the plummeting value of their nest egg of bank shares.

I suggested to them that Irish banks weren't being hammered because of sub-prime, they were being hammered because they had engaged in utterly reckless lending. I also suggested that I would be surprised to see more than two independent Irish banks at the time of our next annual tete-a-tete.

The look of pure fear in their eyes was very illuminating.
 

mairteenpak

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Apr 21, 2008
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196
Re: Developer Sub Prime threatens Banks' Profits

A lot of development land has been bought at prices at which it cannot be developed profitably, since a development would only end up in negative equity, if it were built, and increase the loss.


Banks know that to foreclose on loans that are being rolled over would simply crystalize massive losses. The banks will try and carry the loans forward, on their books as to do otherwise would be like pressing the self destruct button.
 

HarshBuzz

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Re: Developer Sub Prime threatens Banks' Profits

mairteenpak said:
A lot of development land has been bought at prices at which it cannot be developed profitably, since a development would only end up in negative equity, if it were built, and increase the loss.

Banks know that to foreclose on loans that are being rolled over would simply crystalize massive losses. The banks will try and carry the loans forward, on their books as to do otherwise would be like pressing the self destruct button.
I wonder will their auditors force them to recognise this reality?

hmmm, probably not ;)
 

mairteenpak

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The best outcome the weaker banks can hope for is to be taken over.

Unless there is a audit of the current values of the land banks which is credible no suitor will be keen to look at a take over rescue situation.

The strategy at the moment is to hope for better times. The best prospect on the horizon is the Government first time buyer scheme, a poor prospect though still the best on the horizon, as the prospects are not good.
 

HarshBuzz

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mairteenpak said:
The best outcome the weaker banks can hope for is to be taken over.

Unless there is a audit of the current values of the land banks which is credible no suitor will be keen to look at a take over rescue situation.

The strategy at the moment is to hope for better times. The best prospect on the horizon is the Government first time buyer scheme, a poor prospect though still the best on the horizon, as the prospects are not good.
otherwise known as the 'stick your head up your own arse and believe your own bullshit' strategy

both the government and the banks excel at this

anyway to ramble on some more on this topic: predictions re. the future (or lack of) for Irish banks

1. Continued sharp falls in the price of houses and commercial property (despite whatever half-baked scheme the FF\CIF government try to dress up 'helping the hard-pressed FTB). We eventually end up at 2000 prices, despite much weeping, wailing and denial along the way. Hundreds of thousands of people stuck in negative equity for decades. Tens of thousands more financially wiped out on their oh-so-canny buy to let 'investments'

2. A major Irish developer to go spectacularly busto within six months (I'm sure you can all think of your favourite candidate for this). This will cause a chain reaction amongst the banks as they pull the plug on the idiot developers who bought land at 2004 onwards prices.

3. Two small Irish institutions that are heavily over-exposed to the commercial property market to be taken over for a pittance by this time next year.

4. The Government to enforce at least one major 'merger' in the Irish banking sector in the next 12 months.

5. Thousands of financial services workers to be laid off

6. We end up in a situation where we are left with one Irish bank operating and the remainder of the market taken up with other EU banks.

How's my crystal balls? :?
 

katy brock

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Re: Developer Sub Prime threatens Banks' Profits

HarshBuzz said:
mairteenpak said:
A lot of development land has been bought at prices at which it cannot be developed profitably, since a development would only end up in negative equity, if it were built, and increase the loss.

Banks know that to foreclose on loans that are being rolled over would simply crystalize massive losses. The banks will try and carry the loans forward, on their books as to do otherwise would be like pressing the self destruct button.
I wonder will their auditors force them to recognise this reality?

hmmm, probably not ;)
What the Irish banks need is an "Arthur Anderson" type company of auditors. Then, full steam ahead!
 

HarshBuzz

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Re: Developer Sub Prime threatens Banks' Profits

katy brock said:
What the Irish banks need is an "Arthur Anderson" type company of auditors. Then, full steam ahead!
it worked for Enron

oh wait...
 

katy brock

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Re: Developer Sub Prime threatens Banks' Profits

HarshBuzz said:
katy brock said:
What the Irish banks need is an "Arthur Anderson" type company of auditors. Then, full steam ahead!
it worked for Enron

oh wait...

Exactly.
 

expat girl

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May 26, 2007
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mairteenpak said:
The best outcome the weaker banks can hope for is to be taken over.

Unless there is a audit of the current values of the land banks which is credible no suitor will be keen to look at a take over rescue situation.

The strategy at the moment is to hope for better times. The best prospect on the horizon is the Government first time buyer scheme, a poor prospect though still the best on the horizon, as the prospects are not good.
naaahh. Lenihan has just said they won't let the banks fail and the deposit guarantee is now the best in Europe. Brits and Poles with access to BoI/AIB branches abroad might well be tempted to deposit. If that fails, I am 100% sure they will not let any of the Big 4 Irish owned institutions fail.... sadly the American tax payers may not be the only ones stiffed for billions. At least, however, the loans are simpler than the SIV/mortgage bonds that no-one can figure out... not much help, but it is something.
 

Wicket

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Jun 6, 2008
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mairteenpak said:
The strategy at the moment is to hope for better times
But this time can't wait forever. Wihle the banks can accrue interest to keep their P&L healthy they do have a mounting debt on their Balance Sheet and the developers need to start selling to reduce that debt. A sharp correction will happen but the urgency does not appear to be there yet.
 

HarshBuzz

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expat girl said:
naaahh. Lenihan has just said they won't let the banks fail and the deposit guarantee is now the best in Europe. Brits and Poles with access to BoI/AIB branches abroad might well be tempted to deposit. If that fails, I am 100% sure they will not let any of the Big 4 Irish owned institutions fail.... sadly the American tax payers may not be the only ones stiffed for billions. At least, however, the loans are simpler than the SIV/mortgage bonds that no-one can figure out... not much help, but it is something.
politicans promises are worth nothing (and haven't you noticed that the cupboards are bare up around Kildare St?)

there is no 'Big 4' of Irish banks by the way, Anglo and ILP are tiddlers and won't exist by this time next year
 

HarshBuzz

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Cookie68 said:
You could be right there. However, does anybody know what has happened since to the Japanese families caught up the property bubble in the late 80's? Surely they are over all that now (18 years after the bubble burst)?
god bless your innocence!

they haven't been running zero interest rates for twenty years for no reason you know!

it's coming here too except (and this is the real kicker) we have no control over our monetary policy :shock:

now where did I put that Australian visa application....
 

meriwether

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Cookie68 said:
HarshBuzz said:
Cookie68 said:
You could be right there. However, does anybody know what has happened since to the Japanese families caught up the property bubble in the late 80's? Surely they are over all that now (18 years after the bubble burst)?
god bless your innocence!

they haven't been running zero interest rates for twenty years for no reason you know!

it's coming here too except (and this is the real kicker) we have no control over our monetary policy :shock:

now where did I put that Australian visa application....
So they're still f*cked? :shock:

I remember discussing it with a japanese guy at the time and he was saying that his family had taken out a mortgage that could only be repaid by two or three generations. It sounded like a kamikaze move.
A-ha!
 

mountainyman

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Dec 12, 2006
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The Japanese were NEVER fudked.

Unemployment there peaked at about 5%.
They had a construction boom led largely by a corrupt cooperateion betyween politicians and proerty developers.
But the Japanese had a strength that we don't. The Japanese make lots and lots of products that lots and lots of people want to buy. japanese people own and manage these companies.
 

mountainyman

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HarshBuzz said:
1. Continued sharp falls in the price of houses and commercial property (despite whatever half-baked scheme the FF\CIF government try to dress up 'helping the hard-pressed FTB). We eventually end up at 2000 prices, despite much weeping, wailing and denial along the way. Hundreds of thousands of people stuck in negative equity for decades. Tens of thousands more financially wiped out on their oh-so-canny buy to let 'investments'
A once in 2 or 3 lifetimes opportunity for the political party which relieves the burden of negative equity.
Given that all mortgages sold since 2000 have been sold off all around the world the poltical party that introduces mortgage revaluation scheme will win 100 yeard of prty loyalty from those it relieves of negative equity.

Fianna Fail 2050
 

mairteenpak

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One of the great begetters of negative equity is the Interest only Mortgage which is a product which has been extensively miss sold.

Such misspelling has created another type of Sub Prime where in the "investor" used interest only mortgages as a purchasing vehicle to buy rental properties with low yields hoping to capitalise on Capital appreciation. Mortgages were advanced to investors who were dependent on rentals exceeding the interest bills on their mortgages. Instead of further Capital appreciation occurring interest rates increased along with supply leaving yields under pressure.

This type of lending is yet another type of lending that will drag one or more of the Banks down. One bank is rumored to have the vast majority of its investment property lending comprised of interest only mortgages.

Interest only mortgages were used to get developers shut of over priced property at a margin to get the bankers out of the merde.
 

HarshBuzz

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mountainyman said:
A once in 2 or 3 lifetimes opportunity for the political party which relieves the burden of negative equity.
Given that all mortgages sold since 2000 have been sold off all around the world the poltical party that introduces mortgage revaluation scheme will win 100 yeard of prty loyalty from those it relieves of negative equity.

Fianna Fail 2050
I hope you are taking the p!ss (please tell me you are :? )

there is 300 billion euro of private sector debt in this mad little country

how much of that do you think was advanced against 'assets' which are now worth less than the debt? the government (thankfully) couldn't cover it

people are going to have to pay for the poor choices they made and the sheer naked greed which brought them to financial ruin. tough love.
 


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