Merging, may cause some "hair-wired" on the posts in the topic, as merged topic sequence is based on the date.

So the other topic is closed.

Ty.

This post has been edited by cherroy: Jan 17 2014, 10:12 PM

BNM needs to raise rate if
1. RM outflow is severe, resulted RM depreciating fast.
As fast depreciating currency could de-stabilise the economy, due to confidence.
Also it depleted the purchasing power if population across.
Why you want economy growth? is to increase your puchasing power. So a fast depreciating currency is not an interest for BNM or any country.

A outflow money will cause foreign currency reserves depleting.
So watch out the figure of foreign currency reserves, current account surplus/deficit, trade deficit/surplus.
As long as those figures are not in significant deficit situation, it is still orderly.

2. Strong economy aka demand is strong, that could lead to inflation (inflation also a depleting purchasing power factor). High demand is pull factor, aka more demand>supply lead to price hike.
So raising rate could dampen the demand, which eventually slow down the inflation.
But currently, inflation situation is more a push factor, aka cost rising, little to do with demand factor.
That's why until now BNM is reluctantly to raise rate, because raising rate won't able to cure the push factor inflation.

Most emerging countries currencies are dropping across against USD, RM is not alone, due to QE tapering.

Economy or currency level is about balance act in between, too strong, too weak are neither good for a country.

When gov abolish subsidy, cut subsidy (raise petrol price, sugar price, or whatever that has subsidy previously), raise electricity tariff, there is nothing BNM can do about these kind of push factor inflation.

Raise rate won't able to reduce the inflation by those cost associated with it.
As even BNM slam 10% interest rate, petrol price, sugar price, electricity tariff price still remain the same (after the hike). It won't go cheap, or reduce the pressure of goods price rising due to cost associated with it.

I am not talking about the low interest rate that fuel the property bubble or not.
I just highlighted those push factor that interest rate won't able do much on to cure those inflation on push factor items.

Out flow of money will induce rising rate, if foreign currency reserves depleting fast to alarm level.
So watch those figure.

NPL - Non-performing loan, as long as borrowers paying their loan commitment on time, bank won't classify it as NPL, even though the property is "under water".

If you took up 100K car loan, then 100K appeared in the bank asset column of the balance sheet.
They do not care the car is 100K or 200K, the asset amount is based on the amount of loan.

Banks do not classify the property as their fixed asset.
The property is just a collateral, not owned by banks.

Underwater property is not new phenomena, it happened before in HK properties severely back in 1997, and just years ago in US property.

Bank generally do not want to foreclose the "underwater" property.
As long as borrower service the loan, they are happy to status qou generally.

As in an "underwater" property, borrowers can be best to walk away the property, the let banks foreclose it.

Eg. A property previously 800k, with monthly loan 4K,
Now the property only worth 500k, which now 3k (just simply a number)

If the borrower willing to service the loan at 4K consistently, banks are happy to see it instead try to tell the client to top up the collateral margin which might lead to foreclosure, whereby bank only can recover 500K instead of 800K loan amount. A 300K NPL potential incurred, which in massive scale (as banks could have ten or hundred thousand of similar borrower) which could bring down a bank as well.
But if the borrowers still paying 4k every month, NPL won't incur in the bank book.

In this kind of situation. borrower can choose to walk away the property, and save 1K every month which technically is "burned" away in an "underwater property, the borrower is paying at the valuation of 800k.
Or in other word, the borrowers are paying 800k that only worth 500k currently.

There is reason why bank reluctantly to give full valuation on properties in recent years, as it gives margin of safety for the collateral issue for the bank besides the valuation issue.

This post has been edited by cherroy: Feb 4 2014, 05:32 PM

Yes, all bank asset are loan amount given.
Collateral value is not appearing in the balance sheet one.

Personal loan has no collateral so generally they cap the amount at low level (as compared to property loan), (a few ten k or so like that) and charge higher loan rate to compensate the potential NPL.
Personal loan is a high risk loan as compared in the eye of bank, but could give lucrative return to banks. Also, personal loan is a term loan like car loan, whereby a 7~8% rate means a double digit EIR, which is lucrative to the bank.
That's why personal loan is one of worst loan one can have, second to credit card loan which also has no collateral.

Fair value accounting rules only applied when the bank is holding the asset.
A property collateral loan, the value is based on loan, not property in the bank book.
Banks do not own the property at this stage.

If a loan is seviced on time, aka the loan is paid on time, (which is non-npl) disregards the borrower property previously valued at 800k, now become 500k, the loan amount still 800k, and bank still register 800k in the balance sheet as asset.

Insufficient collateral (500K value vs 800K) loan is another issue to deal with, not related to balance sheet until the bank foreclose and holding the property directly whereby fair value accounting start to apply on the property value.

Fundamentally, if a loan is serviced on time, bank won't classify as NPL, disregard the property or collateral is underwater or not, and bank will register the loan amount figure as asset in the balance sheet.
Only if the loan start become dubious aka cannot be serviced, then NPL issue start to incur, and NPL is one of fair value accounting issue, aka

This post has been edited by cherroy: Feb 4 2014, 09:40 PM

Yes, this is true.

Generally, if a property become underwater, aka like my previous example, 800k loan become 500k property value, bank is happy to status quo if borrower still service their 800k loan amount, they won't foreclose just because borrower cannot top up the 300k collateral difference (or margin call), as it is foolish act for bank to do so, if the borrower still service well the 800k loan.

Although bank might have the right to do so (margin call) (in this issue, we need legal expertise on loan agreement to clarify out, that's why I use the term might).
Anyhow, it won't affect the issue we discuss here, as said, it is a foolish act by bank to foreclose a property, that only worth 500K, while borrower willing to service 800k loan they had, just because borrower cannot top up the margin call or top up collateral value for the underwater property.

Bank will lose 300k if foreclose the property just because borrower cannot meet the margin call.
While if bank let the borrower to service the 800k loan, bank won't lose any cent, instead still earn profit through interest charge on 800k, until the borrow default the loan, by then it is another stage story.


It is difference between country rules and laws actually.

This post has been edited by cherroy: Feb 4 2014, 09:21 PM

In US,
banks will immediate suffer the underwater property value, when borrower walk away the property.
In other word, bank if give out loan 800k, now property become 500k, borrower walk away, then bank will immediate suffer 300k loss, as the property is valued at 500k (if foreclosed and auctioned, bank only get back 500k)

While here, borrower need to bare the the difference between foreclosed property vs its loan amount.
Aka even bank foreclosed the property and auctioned it can get back 500K, borrower still owe bank 300k.
So borrower has the obligation to pay the 300k as compared to US.
While if borrower does pay the 300k, bank won't suffer any loss.

Also, it doesn't make sense to apply fair value adjusting on collateral value.

Scenario A
A property previous bought at 500k, loan given 500k. Collateral value is 500k.
Now the property value rise to 1 million, it doesn't make sense for bank to do fair value adjusting, because bank doesn't own the asset, nor enjoy the 500k profit.
(any fair value adjusting will result in the Profit/loss account).
Bank still own the asset in term of loan given that is 500k.

Scenario B
A property bought at 800k loan given 800k, collateral value is 800k. Now property value is only 500k.
Bank doesn't suffer any loss if borrower is servicing the 800k loan, as if the borrowers continue to pay up then entire loan, bank will recoup the entire 800k.
So there is no need to do fair value adjusting, as bank doesn't suffer any loss until borrower default it, which become NPL, which another different stage story.

The origin of discussion is margin call of underwater property, nothing to do with bank A selling the loan to Bank B.

Fundamentally, if borrower willing to service his/her 800k loan consistently, even the property become 500K, generally,

1. Bank will not foreclose the property, nor ask the borrower suddenly to repay 300k.
2. Bank will not make impairment, that resulting in loss to bank P&L.

While if bank A sell the loan to Bank B at 500k, then yes, bank A needs to make an impairment of 300k disregards the borrower still servicing the 800k loan or not.
Which is another issue.

This is similar to, when a person wants to sell a property that being bought at 800k initially at 500k, a loss 300k incurred.

If Bank A decided to sell a loan the worth 800k that is still being serviced consistently, then Bank A is selling at a loss, so impairment incurred, causing bank A loss 300k in P&L.
So it is up to Bank A decision, what to do with their loan.

Basically, banks giving out property loan, do not own the property, until it is foreclosed.

While when borrower cannot pay on time, then provision for NPL needs to be made by the bank.
But if borrowers keep on paying consistently, NPL, foreclosure issues are not triggered.

The bank asset of loan value (under asset of the balance sheet) is based on the borrower's loan amount that with consistent repayment of the loan, (just like Hikari pointed cashflow matter).
While if bank want to sell a 800k loan (a consistently being serviced loan) at 500k, then it is bank loss of 300k through impairment.

The selling of bank asset (loan), or holding a mortgages securities is about on investment bank issue.
There is difference between a bank direct making loan, and an investment bank that holding mortgages securities.

Locally, selling of loan to others is not as widely in US.

Bank will not go under, if borrowers servicing their loan.
So if borrowers are servicing their loan 800K (initial loan amount), then the bank will receive the full loan given out of 800k finally, and its "loan value" will still is 800K under the bank asset, as loan value is based on borrowers servicing their loan.

The loan issue is about yes or no.
Whether the loan is paid on time or not.

Paid on time, good loan, no mess in account.
Not paid on time, doubtful loan, NPL provision start to arise.

Whether white knight come to rescue buying cheaply those doubtful asset is another front, as provision of those NPL needs to be made in the first place disregards whether those doubtful loan being sold or not afterwards.

While if white knight come to rescue, there is also chance of write back, as there is recovery on the provision for NPL previously made.
Banks need to make provision once the loan become doubtful.

Subprime loan is not about packaging it as MBS (mortgages backed securities) or not.
Even prime loan being packaged into MBS.

Subprime loan as its name, subprime, aka the loan made to non-premium borrower.
Just like you screening an apples pile, those good one, (aka have good income, affordable), you classify it as prime.
So whatever left over, subprime.

In ordinary sense, bank only give loan to prime borrowers.
But when property price rising fast time, aka have good time, bank want to make even more loan besides prime borrowers, as in a rising property price situation, even if the loan even turn bad, bank still can foreclose the property recoup the loan. So bank started turn focus on subprime borrower as well.

So next story, banks already knew they are subprime borrowers aka have high risk of defaulting as their ability to repay is not good, so in ordinary sense, bank generally reluctant to make such a loan, (just like here that bank need to screen income of borrower or affordability issue), but since bank can package it into MBS and sold to third party, investment bank etc, so banks basically have transferred the defaulting risk to third party, investment bank who bought the MBS. Bank no longer need to bare the risk of the loan defaulting, so more loan made, the better, more commission/profit can be made through package the loan into MBS, while other bare the risk.

While investment bank also knew it is high risk, they demand CDS (credit default swap) being issued upon the MBS.
CDS is issued by insurance company generally or investment bank, as it is a type of insurance to protect it default, aka when those MBS defaulting, insurance company need to pay the compensation.

While when property price keep on rising, no issues of defaulting, as when subprime borrowers cannot afford to pay, just sell off the property, still can make profit through rising property price, don't need to default.

Every party happy, subprime borrower make profit, bank sell off MBS make money, investment bank make money, insurance company also make money, (premium received through CDS issued, while no compensation need to be paid, as no party defaulting).

So greed started to snowball, more and more subprime being made, when property price surged to unsustainable level, and price started to plunge, ugly scene cascading effect, especially on insurance company as massive compensation need to make on defaulting loan (MBS) due to CDS.
When CDS is being defaulted, investment bank with those MBS defaulting receive nothing, while its holding of MBS lose its value (as loan being defaulted).

So the effect of CDS + MBS, brought down insurance company, investment bank, and sending fear across financial sector.
The fear of which party/bank can go under (who was holding toxic MBS and who is the CDS issuer), means bank lose trust on each other, (as fear of other bank defaulted), while MBS can be changed hand over and over again, until don't know who was holding it, from origin into a totally third party hand, that resulted interbank lending frozen, causing stresses to banks across as banks need to rely on interbank loan for liquidity issue.
The rest is history.

This post has been edited by cherroy: Feb 8 2014, 04:21 PM