The thing about useful stuff is: 25 year old home owner found guilty of leverage

25 year old home owner found guilty of leverage Thursday, September 25, 2008

The media coverage of the financial crisis has introduced the public to bits of City jargon, commonly with a derogatory slant e.g. "short sellers" being bad and "leverage" being a dodgy scheme that caused banks to collapse.

Oddly, most home owners are as "guilty" of being heavily leveraged via the mortages. They have typically used a small deposit for a home and borrowed the rest, with the sum borrowed linked to their apparent ability to repay and their home pledged as security for the loan.

Speculation on the residential property market has been widespread, and for many years it has been seen as and genuinely been a one-way bet. Thanks to low interest rates and easy terms, people have been able to borrow ever greater sums thus giving them more purchasing power [in absolute terms] which has inflated the market. Large profits have been made by property buyers for relatively small financial investments of personal equity, the rest being borrowed on leverage of 9x or more.

Unfortunately, as interest rates have gone up so repayments have become a greater burden to householders; as property prices have fallen so the value of ther security has dropped. In such a climate, the impact is dramatic for individuals. In some cases, it will result in the home being repossessed and the home owner's personal equity in a property being wiped out, coupled with supplementary claims from the lenders for shortfalls on the security provided which failed to cover the loan.

Whilst on a massively greater scale and with far greater implications for the economy, the many leverage similarities between banks and individual homeowners are yet to be fully acknowledged by press, politicians and religious leaders alike or maybe they simply avoid unpopular themes. More significantly, it was and is the widespread belief that the property bubble is bursting, which is expected to lead to greater repossessions and losses on property related loans, that has contributed to the dramatic loss of market confidence.

Labels: leverage, LTV, markets, property, Short selling