Dow hits new record of 13000, as US & world economies continue to grow | 130 comments (130 topical, editorial, 0 hidden)

Re: GDP etc (none / 1)

I think you get a bit of a hard time on ET, wc, cos I think your heart's in the right place...

What's wrong with homeowners having 20% of their homes owned by the bank--why not 30%, 40%, 50%. It depends of course on the individual home owner. There is a tax benefit in the US, for the right kind of homeowner, to have a $1 million mortgage.

If only banks' DID own a proportion of the property and we actually rented that proportion at (say) 20% of the market rental.

But they don't - they create credit on the back of their Capital base and secure it with claims over our properties.

To actually own our properties wouldn't be a very effective use of their Capital would it, not when they can use their Capital as a base for credit creation which allows them to finance a dozen houses for every one they could actually buy by investing their equity in property.

Banks could easily reinvent themselves so that they actually bring together investors in property with investments in property. That way they wouldn't need to put a penny of Capital at risk, as they currently do in the mad world of fractional reserve banking...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Apr 29th, 2007 at 03:00:57 PM EST
[ Parent ]

Re: GDP etc (none / 0)

Partial equity schemes which combine rent and a mortgage share are available in the UK, but not very popular, and mostly offered by the firms that build estates as a way to get people into those estates. They're certainly not a standard fixture on the bank-run mortgage circuit.

I'd have to look into how the numbers work out, but most people seem to buy with a view to owning outright some time close - or ideally before - retirement. So when income drops, outgoings drop too, and they're left with a substantial pile of equity.

You might think that younger buyers would be interested in building up a transferable deposit with a combined buy/rent scheme, but it doesn't seem to work like that. I'm not sure why, because when property prices are exploding a part-share of equity is better than no share at all through renting, and potentially a reasonable investment.

My guess is the banks don't like the scheme because effectively they're forced into property price speculation. Normally it's the mortgage owner who takes all of the risk, and - obviously - even when equity is negative the owner is still responsible for the full amount of the loan.

So if banks co-owned property, a price crash would wipe maybe 10-20% off the nominal book value of the holdings.

But - when prices crash, mortgage defaults lose a similar amount from mortgage loans anyway. So the objection doesn't really make sense. And when prices are increasing, banks are missing out on a huge potential source of income.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 30th, 2007 at 05:32:55 PM EST
[ Parent ]

Re: GDP etc (none / 0)

My guess is the banks don't like the scheme because effectively they're forced into property price speculation. Normally it's the mortgage owner who takes all of the risk, and - obviously - even when equity is negative the owner is still responsible for the full amount of the loan.

My guess is that this is true,

But - when prices crash, mortgage defaults lose a similar amount from mortgage loans anyway. So the objection doesn't really make sense. And when prices are increasing, banks are missing out on a huge potential source of income.

and that this is less true. I know banks don't like defaults--they don't want to own the house. but I imagine their default ratios are easily covered in their interest rates, or there wouldn't be a lot of banks around. and they get a fair amount back on the default anyway--a 20% loan, one year later the property is down 10%, the owner loses everything if he can't weather things and has to default--but the property may be sold for 70, 80, 90%?

by wchurchill on Mon Apr 30th, 2007 at 06:48:39 PM EST
[ Parent ]

Re: GDP etc (none / 0)

thank you for the kind comment.

your idea is not a bad one at all. but I imagine the banks don't want to do it because they think they already have a good business model.

but you would think if the idea is a good one, some other entrepreneurs would have gotten into this and made a good business out of it, and they have not, that I know of. Though I note ThatBritGuy says this is an option in the UK, but it has evidently not been to popular.

one problem I could see is that a shared equity arrangement is really a true partnership. what happens if the owner partner doesn't take care of the house--let's it run down? If he is a wonderful owner and fixes it up himself, how do you pay him for his effort? it might be very complicated for a large corporation to run such a program. while with a loan, it's a pretty straightforward transaction--as compared to equity ownership.

by wchurchill on Mon Apr 30th, 2007 at 06:40:47 PM EST
[ Parent ]

Re: GDP etc (none / 0)

Chris I meant to add that this in all seriousness might be a real business opportunity. Look at the success that micro-credit has had. It's been incredible, as well as very heartwarming in parts of the world where it has helped the poor start their own businesses--but the entrepreneurs are also making money.

Banks obviously didn't move into this area, and perhaps they are just too closed minded, and set in their ways. that could be the same reason they are not moving into this idea you have.

I wonder though how receptive the home buyers would be--maybe they want all of the upside, so they'll save for a house of their own, and maybe even buy a smaller one to start.

by wchurchill on Mon Apr 30th, 2007 at 06:53:01 PM EST
[ Parent ]

Re: GDP etc (none / 0)

You are correct, wc in thinking this is a phenomenal business opportunity.

But not for property purchasers, who, as you identify would not wish to share the gains they are accustomed to see as inevitable - the fact that these gains are caused by deficit-based money does not concern them, and why should it?

However, the possibility is nevertheless there for a purchaser to acquire property using this mechanism. And note that the actual finance cost may be minimised since there is no reason why investment in the capital value of the land need not be treated as "Equity" (unlike buildings, land/location does not deteriorate).

ie while a return on capital will be paid by the occupier on the whole investment, there will be no need to repay much of the capital.

However, the real opportunity using this new form of finance arises at the other end of the telescope.

Equity Release.

The "Capital Partnership" is the best form of Equity Release there is, and wipes the floor with the existing toxic alternatives of:

(a) "reversion" (when you sell part or all of your property to an investor who gambles on how long you live); or
(b) a "roll-up mortgage" - where the interest rolls up - typically at 2% over base rate.

So Aunt Agatha sells (say) 10% of her £500k house to her pension fund, or someone else's, and simply pays 10% of the market rental of the property for as long as she uses the capital.

If she doesn't want to pay cash, she can pay in further equity shares instead.

Like all Equity release schemes, the equity will likely run out one day, but this structure gives :
(a) Aunt Agatha the best deal there is;
(b) Pension Funds a simple new REIT look-alike investment (since LLP and LLC vehicles are tax transparent or "pass through").

To see the extent of the opportunity, in the UK over £1 trillion in property is owned by over 65's free of mortgage.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Apr 30th, 2007 at 07:34:55 PM EST
[ Parent ]

Dow hits new record of 13000, as US & world economies continue to grow | 130 comments (130 topical, 0 editorial, 0 hidden)

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