Banks facing down-turn: how much should the government/taxpayer be expected to do?

Main Question or Discussion Point

Ok this is becoming quite a hot topic and I'm sure most people have heard of the Northern rock fiasco? But do you think your government should step in to bail out banks? And what sort of interest should they charge, to ensure the taxpayer is not forced to foot the bill? Clearly the banks suffering has knock on effects, but should we be giving businesses special treatment because they are losing money or even going under? What is the banks credit rating? :smile:

What should be done, and what shouldn't be?

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/04/17/ncrisis117.xml

Gordon Brown: Banks must admit the truth

Banks must disclose the size of their debts from poor quality home loans, Gordon Brown said on Wednesday night, amid signs that the impact of the global credit crisis may be even worse than suspected.


In a meeting with leading Wall Street bankers, the Prime Minister called on lenders to be more open about the bad debts that have created turmoil in the mortgage markets in the past six months.

Gordon Brown and Michael Bloomberg, the New York mayor
Gordon Brown and NY mayor Michael Bloomberg. Mr Brown urged banks to be more transparent

His intervention came amid fears that the banks are becoming more wary of lending to one another than even the official data suggest.

The crisis, which has left banks and building societies short of money to lend to home buyers, is now so severe that the Treasury is preparing to approve a multi-billion pound emergency loan package for mortgage lenders next week.

Senior officials are ready to agree the plan, whereby the Bank of England will lend billions of pounds to banks - secured against their residential mortgage portfolios.

However, critics said that taxpayers could be saddled with large losses if the housing market falls and the Bank ends up with the bad debts.

The developments came on another troubled day for the market, during which:
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• The biggest mortgage lender, the Halifax, increased the rate on its two-year deals by half a percentage point - one of the biggest single increases since the start of the credit crisis - adding £1,000 a year to a £200,000 home loan.

• The market for buy-to-let mortgages suffered a blow as 16 lenders, including NatWest, were found to have pulled out of the market - including four in the past week.

• A study by Equifax, a credit research agency, showed that half of all first-time buyers were considering pulling out of potential house purchases, which could have a serious impact on the market.

• Figures suggested that 150,000 home owners could have their properties repossessed this year.
 

Answers and Replies

Astronuc
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Well, everyone who owned a home was happy to see housing prices escalating. Those waiting or hoping to buy a home were not. As far as I can tell, it was another case of irrational exhuberance, since too many folks expected home prices to continue to rise. Then too many folks took out 'home equity loans' to finance somewhat extravagant lifestyles. When I was in the UK over a year ago, I was shocked by the high cost of living and high price of real estate. Now it's time for the adjustment.

As for the banks, those that lended inappropriately and irresponsibly should be penalized. As to what that is remains to be seen. Certainly there needs to be increased regulation and oversight.
 
Well, everyone who owned a home was happy to see housing prices escalating. Those waiting or hoping to buy a home were not. As far as I can tell, it was another case of irrational exhuberance, since too many folks expected home prices to continue to rise. Then too many folks took out 'home equity loans' to finance somewhat extravagant lifestyles. When I was in the UK over a year ago, I was shocked by the high cost of living and high price of real estate. Now it's time for the adjustment.

As for the banks, those that lended inappropriately and irresponsibly should be penalized. As to what that is remains to be seen. Certainly there needs to be increased regulation and oversight.
I agree, but that's my point, if the government is going to step in it shouldn't be at the expense of the tax payer, banks should have to pay appropriate rates of interest on loans, to cover the loss to the treasury. That seems fair. Also I don't have alot of sympathy for those paying ridiculous prices for mortgages and the creation of negative equity, everyone knew this was going to happen. People who can't buy because banks refuse to loan money however I feel sorry for.

This is an as you sow situation IMO, banks who have relied too heavily on debt to finance themselves deserve everything they get IMO. Self inflicted injury.
 
Astronuc
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I heard recently (but haven't substantiated it) that approximately 125,000 homes in my state are at risk of foreclosure!

Apparently a large number of adjustable rate mortgages (ARMs) are schedule to kick into higher rates during May and June, and some officials expect a surge in defaults/foreclosures during the 3rd and 4th quarter in the US. So now is not a good time to buy a house, and probably won't be until 1st quarter of 2009.

I suppose also that the liquidity crisis will continue. The question then is have the banks written down all there is too lose, or is there more and how much more. That is what has the markets worried.

It's also complicated by the activity of hedge funds, and so right now no one knows the true impact (loss of wealth), and probably won't until it happens.
 
An update, as of this afternoon, the government have issued bonds as collateral against banks lending to each other; these do not depreciate, ie they are index linked, crisis at least for the moment over...ish.

All I can say is thank de lord for fixed rate mortgages. :eek:
 
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Art
I agree, but that's my point, if the government is going to step in it shouldn't be at the expense of the tax payer, banks should have to pay appropriate rates of interest on loans, to cover the loss to the treasury. That seems fair. Also I don't have alot of sympathy for those paying ridiculous prices for mortgages and the creation of negative equity, everyone knew this was going to happen. People who can't buy because banks refuse to loan money however I feel sorry for.

This is an as you sow situation IMO, banks who have relied too heavily on debt to finance themselves deserve everything they get IMO. Self inflicted injury.
I'm confused by this. Are you under the impression the treasury gifts money to banks in trouble? If so that is not the case. The gov't lent money to Northern Rock (at higher than the market rate btw) and then nationalised the bank, they didn't gift it. Again when the gov't inject liquidity into the banking system they don't give the banks money they lend it but at a lower than the prevailing rate, the benefits of which theoretically should be passed on to the banks customers. Problem is the banks are being greedy and pocketing the differential.

Northern Rock were pretty hard done by really. They were screwed by the other banks during the interbank credit squeeze which allied with careless comments from the B of E and gov't ministers led to a run on the bank by it's deposit customers.

They recently released their results for the past year which showed despite the terrible press they received they made only a relatively small loss of £168 million (which included a write down in assets - £496 m and the costs of nationalisation - £51 m) vs year ago profits of £600 million; hardly a figure to drive a bank under.

Meanwhile the gov't who were a major source of Northern Rock's woes has seized the bank taking a multi-billion £ asset for free and so it is not the tax payer who is carrying the can it is the shareholders who have been stripped of their company.
 
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Awww capitalism gone capitalist, pardon me if I don't shed too many tears. And no it was precisely the fact that the gov was using our taxes for a loan that they should have put a high borrowing rate on it, that and the fact that it's credit rating was appalling of course. :smile: I don't think anyone was particularly happy with the government bailing them out to be frank. Sink or swim, it's not our responsibility to bail out any business, if the banks wont lend then you sink, that's the way it works. Even the Bank of England shouldn't be expected not to behave like a bank, sorry computer says no mate you're screwed. :smile:

If you live by the sword then you die by the sword. Anything else is not capitalist. I wouldn't of risked it myself, could of back fired, let them go under or be bought out by a takeover. What does the government think it is, a business or a government?
 
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russ_watters
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I heard recently (but haven't substantiated it) that approximately 125,000 homes in my state are at risk of foreclosure!

Apparently a large number of adjustable rate mortgages (ARMs) are schedule to kick into higher rates during May and June, and some officials expect a surge in defaults/foreclosures during the 3rd and 4th quarter in the US. So now is not a good time to buy a house, and probably won't be until 1st quarter of 2009.
I'm not quite following - why does that make it a bad time to buy a house?
 
Art
I'm not quite following - why does that make it a bad time to buy a house?
With a huge amount of houses about to hit the market through foreclosures supply and demand dynamics would suggest a further downward correction of house prices is in the offing. This coupled with a likely interest rate hike which would further depress the price of houses would equate to not the best time to buy a house.
 
Independently of that banks are putting high interest rates on mortgages, or not giving mortgages out at all because they can't borrow against them, at least over here, or at least they were until recently. I'm not sure if something similar is going on over there, but seeing as over here the housing market has peaked any house bought at the moment may well be worth x% less in a year, and as high as 5x% less in five years. Thus you'd of paid say £120,000 for a house that is now five years later worth say £110,000 and perhaps even ten years later worth say £100,000. The negative equity trap.
 
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Citicorp is one of the big losers.


Three months ago



Yesterday


Whats next??

A lot of the adjustable rate loans in my area were for three years. That appears to mean that we haven't seen the bottom yet.
 
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mheslep
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I heard recently (but haven't substantiated it) that approximately 125,000 homes in my state are at risk of foreclosure!

Apparently a large number of adjustable rate mortgages (ARMs) are schedule to kick into higher rates during May and June, and some officials expect a surge in defaults/foreclosures during the 3rd and 4th quarter in the US. So now is not a good time to buy a house, and probably won't be until 1st quarter of 2009...
With a huge amount of houses about to hit the market through foreclosures supply and demand dynamics would suggest a further downward correction of house prices is in the offing. This coupled with a likely interest rate hike which would further depress the price of houses would equate to not the best time to buy a house.
Well unless one expects to turn over the house immediately then May / June would be a good time to buy. Certainly the market is historically low in the US.
 
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The banks had to have seen this coming.

From 2005:

With the average rate on a one-year, adjustable-rate mortgage at 4.39% and housing prices continuing to rise in many areas, buyers seeking to keep payments low are opting for ARMs. But some economists warn that homeowners might run into trouble if interest rates are higher and their payments rise when their fixed-rate period ends, typically in one to seven years.


http://www.usatoday.com/money/perfi/housing/2005-03-30-arms-usat_x.htm
 
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The problem with bailing out failed banks is that it leads to more of the "irrational exhuberence" that created these problems in the first place. Why bother taking reasonable risks when there's zero accountability for you?

Remember, the CEO that destroyed Bear Stearns walked away from the rubble with $60 million in his pocket.
 
russ_watters
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With a huge amount of houses about to hit the market through foreclosures supply and demand dynamics would suggest a further downward correction of house prices is in the offing. This coupled with a likely interest rate hike which would further depress the price of houses would equate to not the best time to buy a house.
Well yes - it is likely to get better over the next 6 months to a year, but it sounds like you would agree with me that now is a better time to buy a house than any time in the past two years.
 
Art
Well yes - it is likely to get better over the next 6 months to a year, but it sounds like you would agree with me that now is a better time to buy a house than any time in the past two years.
Yes I do agree and it looks like things are just going to keep getting better and better :biggrin:

Didn't you buy a house not so long ago Russ. Has negative equity affected you? Personally as a longtime house owner I never give a second thought to the current value of my house as one buys and sells in the same market but for people who for one reason or another have to sell negative equity can drive them to bankruptcy which would be a very unpleasant place to be.
 
mheslep
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... Personally as a longtime house owner I never give a second thought to the current value of my house as one buys and sells in the same market ...
No house property taxes in Ire? Happily mine have gone down.
 
Art
No house property taxes in Ire? Happily mine have gone down.
Nope, abolished in 1977 for all but the most expensive houses but as this was never collected that too was abolished.
 
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russ_watters
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Didn't you buy a house not so long ago Russ.
I bought my house in April of 2006, within a few months of being around the worst time to buy a house in the current cycle (in the past 8 years or so -- not exactly sure how long). House values were about at their peak, but mortgage rates hadn't gone up too much yet. I paid something like 5.75% and I know people who paid as much as a full percentage point less a year or so earlier.
Has negative equity affected you?
I have a 5 year ARM that I may refinance later this year depending on where the rates settle out. I don't think the FED is finished dropping rates, but they are close. We'll see. Otherwise, there is no reason why negative equity would affect me yet.

I'm not sure what houses in my neighborhood have been selling for lately, but according to Zillow.com (if that's accurate), my house is worth a couple of percent more than I paid for it.
Personally as a longtime house owner I never give a second thought to the current value of my house as one buys and sells in the same market but for people who for one reason or another have to sell negative equity can drive them to bankruptcy which would be a very unpleasant place to be.
Yes, I haven't given my equity situation much thought either, but someone in a bad spot would now be in a really bad spot. Still, I have a friend who last year streamlined her budget to save up to buy a house and may be ready to do that later this year. Some people win, some people lose. That's how markets go sometimes.
 
Moonbear
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Well yes - it is likely to get better over the next 6 months to a year, but it sounds like you would agree with me that now is a better time to buy a house than any time in the past two years.
Yep, it's a gamble right now. It might stabilize or might keep dropping. But, the same rules should apply that did several years ago while the market was still climbing. If you're planning on moving into a house and living there the rest of your life, and can buy it on a fixed-rate mortgage, the timing doesn't matter much at all; in the 30 year term, the value will continue to go up. If you are looking at a more short-term purchase (i.e, a starter home with plans to move into something larger once a family is begun, or someone in a volatile job likely to need to relocate in a few years), then it's as risky now as 5 years ago whether the market will hold, increase or drop.

I'm not as inclined to think the government should be bailing people out for bad financial decisions. If banks are losing money when the ARMs increase beyond the affordability of the person with that loan, they could cut their own losses by not raising interest so far for people holding those loans and make it so they can keep paying. If the bank wants to force people into bankruptcy and sell the house at a fraction of what they paid for it, then that's not the government's job to bail them out for stupidity.
 
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Local banks here are taking a hit from defaults on contruction loans to builders.
 
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The government should not involve itself with private institutions. The idea is that government is limited on how much it can effect individuals, I would think that using taxpayer money to help out poor business decisions is not a very free market act. Besides the government is using taxpayer money to bail these banks out, I didn't make the decision to have a life that was beyond my means, I chose to stay where I could afford the housing prices. I guess what I am getting at, is it right for individuals to bare the cost and misfortune of others, that is what it really comes down to.
 
The government should not involve itself with private institutions. The idea is that government is limited on how much it can effect individuals, I would think that using taxpayer money to help out poor business decisions is not a very free market act. Besides the government is using taxpayer money to bail these banks out, I didn't make the decision to have a life that was beyond my means, I chose to stay where I could afford the housing prices. I guess what I am getting at, is it right for individuals to bare the cost and misfortune of others, that is what it really comes down to.
Wow someone agrees with me? That has to be a first for P&WA? :smile::tongue2:
 
Art
Wow someone agrees with me? That has to be a first for P&WA? :smile::tongue2:
If a bank was allowed to fail the direct consequences would be that the people who deposited money in that bank would lose their savings. These are not people who have speculated in property or people who have lived beyond their means, these are just ordinary folk guilty of nothing but having a bank account, a necessity in the modern world.

If Northern Rock had been allowed to fail the knock on effect would likely be a run on all the other banks causing them to fail too and a total collapse of the banking sector which is not in anyone's interest and so you as a UK citizen benefited directly from the gov'ts intervention to bolster Northern Rock as did everybody in the UK who has a bank account which would be just about every tax payer.
 

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