Thursday, November 13, 2014

ON LVRs

I can understand the need for the imposition of Loan to Value ratios (LVRs) by the Reserve Bank as one of the tools necessary to help curb runaway house prices in Auckland and Christchurch and certainly we never want to go back to the situation that existed in the early to mid 2000s where Banks would lend 110% of valuation on little or no equity.

But perhaps someone could explain to me why the 20% LVR can not be limited to just Auckland and Christchurch purchasers with the rest of the country at say 10%.   There has to be a reason for the 'one glove fits all' approach but, for the life of me, I can't figure it out.    Educate me please.



10 comments:

workingman said...

Well this is the problem with having a central bank control limits, and banks being able to use fiat money to create loans out of thin air.

If you make a loss on money that does not really exist then have you made a loss? If you had to lend out real money and savers who had lent you that real money would be upset if you lost it, then the individual bank would be a lot more careful about how it lent it out.

Adolf Fiinkensein said...

Vet I'm confused . Do you mean 10% and 20% deposits with 90% and 80% respective LVRs?

Paranormal said...

Vet as I understand it the LVR's were not brought in to curb house prices. Rather they are to reduce the risk of debt equity collapse if the market corrected and our banks were holding too great a debt.

Anonymous said...

Paranormal has got it right. Whatever the pollies might say, the LVRs are not there to curb house prices; they're there to protect the economy from over-zealous lending.

The Veteran said...

Adolf ... yes (although I acknowledge you can circumvent the LVR if you are prepared to pay a higher rate of interest).

Paranormal/Anon ... if that's the prime reason then OK. I acknowledged in my post that no-one wants to go back to 'cowboy' lending that took place prior to the GFC. But I think you can make a case for a reduced LVR to apply outside the Greater Auckland and ChCh Metropolitan areas as a means of stimulating local economies (and perhaps attracting people away from Sodom and Gomorrah - with abject apologies to all those who live there).)

Adolf Fiinkensein said...

Vet. Normal practice is to require a client to buy 'mortgage protection insurance' to indemnify the bank against a loss in the event of mortgagee sale, where the LVR is over 80% (or is it 90%).

This insurance is solely for the benefit of the bank. The trouble was, in the US, when the shit hit the fan, the mortgage insurers went broke, such was the scope of the negligent lending - enforced by Clinton and the Democrats who, just like NZ labour today, want people who can't afford them to own homes in high priced city suburbs.

Paranormal said...

Adolf - that mortgage protection insurance normally only pays out the lender when the borrower dies.

In the US it was different in that the legislation did not allow personal guarantees. The borrowers were able to walk away from the property without the debt.

Vet, the same issues apply across the country and are more economy related than house price related. If we hit another GFC shock, and it is quite possible it will come, and all property takes another tumble, it doesn't matter if you're in Auckland or Eketahuna. If you're sitting on negative equity you're in trouble. It almost runs counter to your argument in that the potential to recover from a negative equity situation in Auckland is better than in Eketahuna. House values are more likely to recover in Auckland than the regions and it may be easier to maintain an income in Auckland following another GFC event.

Adolf Fiinkensein said...

Paranormal

"that mortgage protection insurance normally only pays out the lender when the borrower dies."

Not so, I'm afraid. It pays out the difference between what the bank is owed, including penalties and charges, and the proceeds of a mortgagee sale in the event of default.

Anonymous said...

Just like the supposed mortgage protection insurance that some NZ finance companies thought they had purchased from Lloyds? Turns out they only paid out if a fire had destroyed the security. This from C+M in 2003: "Capital Secured Deposits are invested in mortgages which are insured through Mortgage Indemnity and Mortgage Impairment Insurance Policies. Our policies are underwritten by syndicates at Lloyd’s of London which means your capital is protected in the event of a default." http://www.goodreturns.co.nz/article/976488103/security-good-rates-sound-growth-for-capital-and-merchant-finance.html

Here's what individuals can buy: http://lloyds.instantcover.co.nz/InstantCover/Product/mortgage/GetProductDetails/

Paranormal

Adolf Fiinkensein said...

Oh dear. You mean they didn't read the policy documents before they signed up?