Forum Replies Created
Hi Yoss,
I think it’s getting a bit off the topic re who was in the crowd / who was on the field – the post relates to an article on risk grading by the banks. My point being that the banks have already adopded changes in response to Basel (amongst other things). NAB specifically changed equity risk grades from A to D to A to J. Client risk grades were revamped at the same time.
NAB had a huge internal focus to adopt these new policies. They even called the internal training Basel – e.g. All business bankers had to complete new Basel training modules to learn how it affected their approval authority etc. What part of this has or has not been implemented as law is irrelivant as the banks risk policies are not purly legislation based. In many cases bank policy shifts in anticipation of pending rules / legislation. Maybe with Basel they jumped the gun however they have adopted many risk grading measures as a result.
I’m not too sure where you are coming from re who was in which meetings – unless you disagree with my post re banks having already implemented new risk grading as a result of Basel ???
I think the real purpose of the topic is risk grading and whether or not it will slip into the retail banking sector in terms of pricing etc and if so how this will effect investors.
It is also worth noting that non comforming lenders for a long time have adopted risk grades with higher rates based on client credit history and LVR. The non conforming lenders cetainly haven’t adopted these rules because of Basel so I certainly am not suggesting it is the only grounds for risk grading.
Forgive my spelling – back on the iPhone…
Yossarian wrote:Banker wrote:blackhotel wrote:Imagine a bank like that!Sounds nice in theory. The biggest cause (in my opinion) to the financial crisis in the US was and still is non-recourse lending. Most loans are and were non-recourse which means if the bank sells the property for 300k and you owe them 400k – you are not liable for the 100k difference. Therefore when the market crashes you can hand in your keys with no consequence to your other assets. In the US banks had so many keys being dropped off some had key boxes installed at the doors. In some cases a key put in the box represented a $1.0M loss to the bank. Lots of keys makes a bank bankrupt. In Australia if the bank sells they also have recourse to your other assets and will bankrupt you if need be. Therefore most people will struggle to keep paying – keeping prices stable and avoiding thousands of firesales by the banks. What happens to Black Hotel was a matter of bank in crisis control. They would waive interest in full if required as long as you hold on to the keys – As log as the US keeps lending on this basis their property market will remain at risk. Banker
No recourse to your toerh assets, but this is only part of the story. The importance of your credit score in the US is such that defaulting on your mortgage not only impacts on your ability to get credit, but also makes it very difficult to get any utilities in your own name, a rental property or even a job.
It is simply incorrect to imply that defaulting on a non-recourse loan is somehow without material consequences (in the 50% of jurisdictions that it exists).
Agreed there are a lot of other factors however a huge number of Americans handed keys in without defaulting prior to this on their loans.
If you had a property with a loan of 600k the property is now worth 400k – there is a pretty large incentive to walk away? Without a doubt it triggered massive capital losses for many US lenders.
That is ‘comparison’ as opposed to ‘compassion’. Not sure if bank and compassion should be in the same sentence.
Yossarian wrote:Hmmm."Banker" , the Basel (not BASIL or BASAL) accords (I and II) are the recommendations on the Basel Committe on Banking Supervision. Central banks and regulatory bodies are represented, not "actual" banks.
I thought I did pretty well with spelling given it was all on the phone… Basil, Basal or Basel – you obviously know what I meant. By the way Committe is actually spelt Committee (extra ‘e’).
It might have been central bank based however I was at NAB at the time and we had a whole team sent over there – so did ANZ and I would assume quite a few other banks. NAB Introduced changes to risk grading almost straight away: all business bankers had to go through training to adopt new polices as a result of Basel…
Central bank or actual banks – it allowed the banks to hold less capital in compassion to lending if they adopted the new guidelines – therefore a direct correlation to pricing on a deal per deal basis.
Slallen – can you tell us which two lenders you used?
I approved a deal within 12 minutes recently – major bank.
This is nothing new however it is common in commercial rather than retail markets. In australia banks often lend (for commercial) with base rate plus margin. E.g. Bank bill rate plus 3.0%.
For commercial lending banks have two key risk grading systems – one for lending margin and the other for risk grade
e.g.
Rating 1 to 24 for client risk grade. To get a low number you need consistant turnover, profits, assets, clean credit, length with current bank etc etc etc. It is almost impossible to establish a risk grade without putting all the data through a computer.
The second grading is say ‘A’ to ‘J’ and this relates to equity e.g. Borrow up to 10% of residential or 7% of commercial property and you might be “A”. Borrow an extra 10% and you are “B”…
catergory “D” is standard LVR e.g. 80% residential or 70% commercial.
With all this in mind. A client who is D7 might be an average 80% LVR investor. Category “F” might be a company wanting to lend prodominantly property secured however also have some reliance on other assets e.g. Debtors and stock etc (total debt might be 100% of property assets). Category J is either borrowing twice the value of property or NIL property e.g. Unsecured overdrafts.
Cars loans might be G and say a 200k beam saw might be H ( reflecting a car is better security than a Beam Saw).
so so soBanks before BASIL (Basal is a bank term for when banks around the world met is Basil to establish a universal approach to risk grading etc).
NAB was only A to D as opposed to A to J.
Before basil nab could lend 80% on residential and 70% on commercial. This was category B (cat A was half these LVRs). CAT C was up to double standard LVRs. Cat D was above double standard LVR.
Problem was 81% LVR was considerred the same risk as 159% LVR for pricing ( both were cat C).
Basil allowed the banks to more closley monitor risk and hold different levels of capital reserves for each risk grade – (they have to hold more cash liquid assets for 100k lent CAT F than 100k lent CAT B. Therefore cost of funds is higher for riskier category. Hence higher margin over base rate.
Risk grading is already here for home loans however it does not effect pricing. It does however effect paper work requirement E.g. CBA might not need bank statements for refinance if CAT 1 or 2. They need 6 months statements for all other clients.
NAB has risk grade charts with say 1 to 24 along the top and A to J down the side. If you are low right your margin over bank bills is higher than top left.
I don’t think pricing will change based on risk grade in retail banking – you will have a better chance of a discount though if you are graded well.
Banker
blackhotel wrote:Imagine a bank like that!Sounds nice in theory. The biggest cause (in my opinion) to the financial crisis in the US was and still is non-recourse lending.
Most loans are and were non-recourse which means if the bank sells the property for 300k and you owe them 400k – you are not liable for the 100k difference. Therefore when the market crashes you can hand in your keys with no consequence to your other assets.
In the US banks had so many keys being dropped off some had key boxes installed at the doors. In some cases a key put in the box represented a $1.0M loss to the bank. Lots of keys makes a bank bankrupt.
In Australia if the bank sells they also have recourse to your other assets and will bankrupt you if need be. Therefore most people will struggle to keep paying – keeping prices stable and avoiding thousands of firesales by the banks.
What happens to Black Hotel was a matter of bank in crisis control. They would waive interest in full if required as long as you hold on to the keys – As log as the US keeps lending on this basis their property market will remain at risk.
Banker
ryan mclean wrote:What are the lending criteria for no doc loans? Why would the banks lend no doc and how can they see if you fit their criteria?The major banks don’t do no doc – you will need a smaller non-banker lender. Low LVRs and high rates. Hence a lot of people take the common fraud opition with low doc. Richard has a point of the future of low doc – I’m sure they will be around however rules like providing bas statements and confirming a trading business exists (rather than property holding) will be more relivant.
As this is a property forum, we don’t get too many posts on cashflow generation outside of property. I am a strong beleiver that to grow a strong portfolio you need a seperate cash cow – the fatter the better…
If you don’t have one you might need to start with a goat.
Terry is spot on. Go caveat go…
even if the purchaser has put one on, the wife can put one on too as she will have a clear interest in the property.
How long has the husband owned the property and how long have they been married? hope the poor bugger didn’t already own th asset and got left with his pants down…
I went to a training session with the head of one of the major banks fraud teams recently.
Their biggest two areas of fraud is;
1. false income information
2. Non disclosure of liabilitiesThe biggest problem with bank low doc loans is that if you actually read the low doc declaration they do not state ‘what you think you might earn’ or ‘what you expect to earn’ – all major 4 actually ask ‘what was your taxable income in the last financial year’.
This banks don’t usually lose money from this type of fraud – not like fake name and ID applications where the deals settle and someone does a runner etc.
So the reality is: if you are committing fraud you can not say it’s not fraud cause everyone else does it, or your broker / banker says a figure to get over the line. If the figure does not match you NET income – it is fraud…
The bank is also monitoring brokers / bankers with a high percentage of low doc deals.
So question is – is it a fraud you are comfortable with?
For a lot of investors the answer it Yes.Hi Matt,
Thanks for the post.
It seems that almost everyone has this idea in their head that banks cross collateralise all properties, all the time, without thought as to be benefit / downside of the structure. It simply couldn’t be further from the truth. Most relationship bankers I know prefer not to cross properties for simple transations as it makes their portfolio easier to manage (not crossed) e.g. Future increases / partial discharges etc.
I’m still waiting to see who can give some feedback on the example I listed 5 or 6 posts above – why you would not use crossing in a limited capacity such as this.
The argument that you should not cross all properties with all debt is a no-brainer; of couse it’s a bad idea. However there are also tax problem using cash from other facilities:
e.g. If you have 10 properties, all stand alone and take 5k from each property as a depoist for one new purchase, you can have mixed purpose facilities. If you sell that property in the future each of those 5k’s in no longer tax deductable as the associated investment is sold. You can end up with a huge number of loans with mixed purposes which creates an accounting nightmare.
If you understand when it makes sence to cross e.g. Keeping trusts clean and protecting their assets (refer example above), how to cross in a limited capacity and for a limited time ( refer above), and you also want ensure loans are strutured in the right entity(s). Crossing has benefts.
When you have 2 -3 properties these benefits are not nessisarily relivant however more sophisticated investors with several entities / trusts will have benefits.
If you keep Ll of our loan contracts and can read/ understand the security schedules – you can avoid the common problems.
I understand your predicament.
Re additional 50k. The dollar amount is not so much the point – point being that aggressive invesment stratergies are always capped by equity or servicabilty or both – therefore how do you make more money and make it faster to feed your property investment ambitions???
How do you make an extra 50k, 100k or , 150k to use for depoists each year?
Common problem.
Re borrowing on second mortgage:
What is in it for the investor if they have more equity in the transations than you?
Will investors see 100% ( or close to it) gearing as too high a risk for 10%?
2nd mortgages at 14% are often subject to low lvr’s e.g. If you have a 50% lend and need a 2nd to get to 70% but cannot obtain bank finance. LVR’s above this on second mortgages are extreemly expensive.Maybe you will find someone with a few $M to give to you for your depoists however Im not sure what your chances are.
I would be brainstorming a few other options to make money that doesn’t need the same level of capital investment: or find an investor who wants to become a partner.
So have you explored other ways to make cash? E.g. a way to make an extra 50k per annum to help raise deposits and provide servicing for banks?
To grow a really big portfolio you also need a good cashflow generator… If you could sort this you could buy as many properties as your heart desires!
trust4sal wrote:I;ll not be borrowing money from any lendor for that.Hi Terry. Agree with your post however no point in tipping is cash to buy in trust and having no asset protection for the original purchase price plus costs e.g. Only protecting growth.
Every time I use to annual review a file in the bank I would point out beneficiaries loans. If you have finance outside of the trust e.g. Home loans or personal investment loans – they can be refinanced e.g.
home or investment loan 300k
beneficiary loan in trust 200krefinance to a split – 200 in trust, 100 in personal name. Purpose of funds for trust loan is refinance beneficiaries loans to bank debt. Beneficiaries used funds to pay down debt in personal name. Needs to be controlled by the bank to keep the LVR in check.
Almost all my clients are trusts – I don’t let them keep beneficiary loans on balance sheets.
This might involve guarantees as the borrow and asset owner might not be the same however provides a more secure trust structure.
Call me naive but dont accountants, financial planners, lawyers, developers, real estate agents and mortgage brokers all do the same thing?
They all have their own agendas and they all know other people in related areas they will refer to…
Terryw wrote:Company shares are also considered property – so if you are sued they could fall into the hands of creditors.You stated you will not be borrowing. If you contribute cash to buy the property, it will be on the balance sheet as a loan from you to the trust. Therefore an asset to you – e.g. Similar to shareholdings. Be careful not to set up a ‘dud’ trust where the asset is vulnerable regardless of if it is the trust, trustee or or beneficiary is sued…
If your focus is distributions – trusts are great!
You don’t even need him on title to borrow. You could have had him as guarantor or even co-borrower.
Sorry but 10% to get you to 100% will be a stretch. If you look online for second mortgages You are closer to 18% but you still need some equity. Caveat loans can cost up to 5% per month.
You need to work out a way to get some cash / assets first.
Depends on the lender. CBA retail are 1 to 5. If you are a 1, your own estimate of property value is acceptable as a valuation and deals are automatically approved on 95% of cases.
NAB business bank have grades 1 to 23 ( again 1 is best).
All lenders are different.
Re lending on future value. I cannot count how many people have asked me to lend say 100% of a project because it will be worth more on completion. There are not too many business transactions outside of property either that allow you to take your profits, or offer them as security before you’ve made / earned them.
Banks often revalue property on completion as part of standard policy – you can take your profits then.
