The coming worldwide credit crunch

 There now seems to be a trend in which homeowners who are able to make payments but have negatiive equity are walking away as they don't see the point in paying 2to3 times as much for a mortgage as compared with renting, particularly when there house is worth so much less than they paid for it.

The problem here is that someone has to pay for this "freshstart" and it will be the average man in the street. How many investors or banks are going to put up money in the future for mortgages if borrowers are just allowed to walk away. This will do so much damage to the lending industry that mortgages if available will be more expensive and lower loans to value. The only way you will be able to get a loan is by putting down 25%. There is no free lunch anymore and home prices will have to adjust to this new lending regime. No bottom in sight for houseing in the US.

From the Wall st journal :

Some financial advisers are even encouraging homeowners who are upside down to consider foreclosure, which they see as a purely financial decision with limited negative consequences. YouWalkAway.com, a Web site started in January that offers foreclosure counseling to homeowners, advises that borrowers who default on one mortgage can typically get another mortgage between two and four years after a foreclosure. Then, "before you know it, you will have this behind you and a fresh start!" the site says.

A foreclosure will stay as a "strong negative" on your credit report for as long as seven years, though the impact on a borrower's credit score declines over time, says Mike Campbell, chief operating officer of Fair Isaac Corp., maker of the popular FICO credit score.

"Every single person we talk to either owes 100% [of their equity] or is upside down anywhere from $10,000 to $300,000," says John Maddux, co-founder of YouWalkAway.com, which charges borrowers about $1,000 for advice. Mr. Maddux says the site has received more than 190,000 visits and about 20% of their clients are investors.

Hey TJ, how about starting a new thread, the TJ222 thread? I'm getting confused about where to post, this one or Downturn in Price!

A bit of cut'n paste of my own:

Extract from a report by the Asociación Hipotecaria Española (Spanish Mortgage Association) on 2008 forecasts:

The second half of 2007 was marked by the US subprime mortgage (mortgage loans with
low credit rating) crisis which directly or indirectly affected nearly all of the world’s finance
markets.
In the case of the Spanish mortgage market, neither the legislative framework in force
before the crisis, nor that reformed by Act 41/2007, allow for titles to be issued guaranteed with
subprime credits.
The Bank of Spain swiftly reported that there were no significant investments in this type of
asset by the Spanish financial institutions. (really?!)
Hence since the beginning of the US crisis there was evidence that the Spanish mortgage
market was not directly affected by this type of risk.
The initial confusion about the limits and importance of the real contamination of the
markets and financial institutions became a confidence crisis which in one way or another
affected and cast doubt on the Spanish mortgage market.
The first doubts about the Spanish market were levelled precisely from foreign institution
and markets which, shortly afterwards, were confirmed as the most seriously affected in Europe
due to their investments in US subprime.
Unfortunately certain statements from the same Spanish finance sector have also
contributed towards creating a climate of distrust, and have been used by some foreign media
in reports or articles with little technical rigor but with broad media impact. (understatement?)
Along the same lines, opinion articles and “research” is still being published focusing on
isolated geographic areas which in no way reflect the national reality and which lead to a
“distorted” market evaluation.

Your thoughts, sir?

Hi Roberto

Thanks for your article, I read it with interest and some incredularity.

I just started posting on the downturn in price thread as i wanted to contribute, but as I didn't start it, I didn't want to hijack it, so returned to my own thread. Essentially its the same subject, so one thread will do. Also some people seem irritated by my comments, so I will post on my own thread and then if people don't want to read it, they know not to.

Back to the article a number of points are apparent:

1. The Spain houseing market was in trouble long before the credit crunch was even apparent. I think from talking to local experts like Rixxy, prices probably peaked around 2006. Once prices stopped riseing and started to fall the jig was up. Altho interest was originally started by genuine buyers in the early days, those people who wanted to relocate to Spain and enjoy a new way of life, or those wanting to retire, the latter part of the boom was driven by holiday homes and investment.

The whole concept of holiday homes for the masses was always fundamentlly flawed, infact i think it was a concept dreamed up by big developers and estate agents to sell huge numbers of two bed apartments that would never normally have been sold. We are told now that people have trouble paying their bills without resorting to debt, or filling the car, so how can they afford a holiday home, something that is normally the reserve of the rich?

It made sense for a few years because prices were riseing and the poor punters could be convinced that not only would the apartment be self financing, it was also their route to easy riches and a secure and confident retirement. Who wouldn't want to buy one under these conditions?

Of course sadly this was an illusion as riches for the masses always is. Anyone who had any sense and asked about supply and demand or rental occupancy/returns would have realised this. Not to mention the new apartment block going up just next door, with another 800 hapless punters looking for tenants for identical and faceless units.

So my point is that the houseing market in Spain was a dangerous and unsustainable boom which was destined to collapse in time what ever happened. I think it would have collapsed in time even if the wider world was not heading into recession. People who bought at the height of the boom got variable rate mortgages at 2-3% and since then rates have nearly doubled, so that alone would have put a lot of people under stress even if they had tenants.

The fact is that the boom was driven by investment demand for holiday homes, and now that is gone and the investment has turned into anything but an investment, there are simply not nearly enough genuine buyers to sustain the market. Also confidence has gone and even the most clueless punter must have by now realised that the game is up.

2. As if No1 was not bad enough we do now have a credit crisis and a general bursting of the bubble in houseing in countries like the UK where there are genuine reasons for high prices, ie good local wages and limited supply ( none of which even remotely applies to Spain). Spain's houseing market was driven by high prices in western Europe and the ease and availability of cheap credit from equity release and in the latter stages UK lenders jumping on the bandwagon. Once prices stopped riseing in the UK ( which was laways inevitable at some point) alot of the demand in spain would vanish as people could no longer borrow from their own homes, or had the confidence to spend lots of money.

3. Finaly if spain was to dissapear from the world map overnight, the world economy would not even miss a beat. What happens in spain is simply irrelevant to the world as Spain's invfluence is so small. Its a tiny tiny contributer to world GDP, and doesn't export oil or anything much that the world coudn't get from someone else. Despite the fact that Zapatero thinks he is a world statesman, outside Spain he is a nobody and infact probably the world is well aware of his shaky foundations that are inconsistant with his ego.

So to summarise wether spain has any subprime is irrelevant. What matters is the wider credit market, confidence in property generally and the health of western European borrowers and the US economy. As I have stated before the US represents 25-30% of worldwide GDP so the US consumer is paramount. If the US goes down the toilet as looks likely then Europe is going to suffer too.

Sadly Spain's property boom was built on such shaky unsustainable foundations that it was going to collapse anyway. Given the condition of the outside world that collapse is now going to happen much quicker.

Sure there are  a few genuine lifestyle buyers who want to buy for the right reasons and have sensible finances and don't need rent. However these people are paying prices that were a product of a massive boom and easy credit. Now these conditions are gone, the prices must adjust to pre boom levels. if they are not very careful these genuine buyers are likely to suffer from the consequences of others. This is the message I have been trying to get across.

More

Can you explain why one seems to be 145 and the other 345k. I know the 345k one has a swimming pool on its side, but even so, the novelty must wear off soon, ie when the water falls out.

TJ, thanks for your insight in response to the article I posted, as ever, very interesting...........but OMG, so depressing as well

I was wondering if I should think about buying property in the US now, but since that country is "going down the toilet", seems like not such a good idea either. UK is screwed too, apparently. Is anywhere worth investing at the moment? Stock markets are shaky, interest on bank deposits is dropping - what should we do? I'm beginning to wish I was completely skint, then I wouldn't have to worry!

Hi Guys - and to add to that its a fact I get 5-6 people daily wanting to auction their properties. Most of these wont sell as they owe more on a mortgage than they will actually sell them for.

I spoke to 2 yesterday and 3 people today who will be not paying their mortgages anymore and letting repossession take place.

I have advised them they may get chased in their home country for any difference by the lender bank, but I am not 100% sure of the facts of this. I will be finding out if the debt will or can be sold across borders and also if a person non resident claims bankruptcy in Spain, whether that protects them! Certainly interesting but also scary as well!

Banks are taking longer to reposess and the courts are full adding to the delay in it. A mess for sure!

Shame I cant charge 1000 dollars for my advice really!!!

Hi Rixxy

From onfo that I have the Spanish Banks will not follow to the U.K Not sure about the U,K Banks.

Many will be giving the keys back because of the legal status of their property makes it difficult/impossible to sell or live in.

Now any action against these may just be more difficult as the Banks surely have a legal duty to ensure they lent against property that is illegal.

If the property is never going to be made legal then may be its a case against the Banks or the Bank guarantee.

Dan

Hi Rixxy

From onfo that I have the Spanish Banks will not follow to the U.K Not sure about the U,K Banks.

Many will be giving the keys back because of the legal status of their property makes it difficult/impossible to sell or live in.

Now any action against these may just be more difficult as the Banks surely have a legal duty to ensure they lent against property that is legal.

If the property is NEVER going to be made legal then may be its a case against the Banks or the Bank guarantee.

Dan

Roberto

Its depressing alright, but unfortunatley thats reality. Even cash is being devalued at 15% a year in Euroland thanks to the money printing and expansion of money supply. In the UK M3 is growing at 13% which explains why everything you buy is going up in price.

The good news is if you know what to do you can protect yourself and thi shas been the purpose of this thread. You need to invest in stuff which is valuable and can't meaningfully be increased in supply. So that counts out Spainisg property and BMW X5s and flat creen tvs.

Look at oil, gold silver platinum, palladium, copper, sugar etc the lsit goes on.  Plenty of stuff to protect yourself, buyt you have to be quick as the jig is up and the market is catching on. Once people realise that paper currencies are not a store of value then there will be a rush to the exit like you have never seen in your life. But first come the strikes of public workers and the unrest as people struggle to mak ends meet amidst soaring inflation and stagnant wages.

Silver is up from 4$ to 20$ an ounce in the last 2 years. Its up nearly 40% just this year as people try and exchange paper money for something real. Go0 back and read my bit about the 5 pound note and what it promises to pay. I have been warning you all as best as possible.

Dan, I think you meant LEGAL.

Now any action against these may just be more difficult as the Banks surely have a legal duty to ensure they lent against property that is illegal.

Whoops

Thanks soooo much

Dan

I understand what you are saying Dan, but in the late 80s early 90s UK, after so many banks were caught with writing off the difference in the outstanding mortgages and the sales price, legislaion was changed to allow the banks to collect the debts. They had a 12 year time limit to do so and I knew of several people who thought they were clear, being chased after 5 years or even longer!

I see no reason why the debts will not be sold across borders and I also know of a company seeting up in the UK who will have a branch in the UK to do so!

Its a risk for sure.

Unfortunatly banks tend to get their money back one way or another. Everyone will suffer as they raise their charges for all products and services. I notice arrangement fees in the uK have gone from a few hundred pounds to a few percent of the mortgage, talk about inflation. They will increase charges for running your account, DDs, letters etc. Everything they do will go up and morttgages in particular will be very strict, I imagine repayment only and 25 to 30% down with very strict valuations.

Banks are in the business of making money and they will get it from us one way or another. unfortunatley this will also be a massive drag on the property market as we experience the exact opposite of easy money.

As you say Rixxy there will be a few busineses spotting a profit opportunity in chaseing the debts in the UK.

Hi

Northern Rock 2%

Now back to Spain

The Banks have supplied a mortgage on a property thats not legal through say no habitation licence or its an illegal build

1 You cant sell it

2 I have heard you cant rent it

3 I have heard you cant live in it,

As one cant do either through no fault of their own the only option for many will be to walk away.

Now are we saying that the Banks will take any shortfall to court as surely they are party to the situation.

Dan

The same cash that TJ tells us won't be worth the paper it's printed on soon?  I suppose you could stuff the mattress with it, or use it to save on toilet paper?

Just out of interest, I asked my bank manager today about subastas, i.e. repossessions. He told me the bank (BBVA) have their own in-house company that disposes with repossessed properties, and that they sell them at bank valuation. So, no bargains there, then. He then told me that if his branch has a customer who is desperate to get out before defaulting, he would have advance knowledge and would be able to  tip me off, so to speak. I asked if he had anything interesting in mind, and the one property he told me about, and the approximate price that he might be able to get it at for me, had me laughing, well, all the way out of the bank. Where are all the damned bargains, for God's sake?

Where are all the damned bargains, for God's sake?

Rob, I found one, look. WOT, not wot you want ?? NEVER.