Can bank still sell my property regardless of meeting repayment obligations?

Discussion in 'Loans & Mortgage Brokers' started by property_geek, 13th Oct, 2019.

Join Australia's most dynamic and respected property investment community
Tags:
  1. property_geek

    property_geek Well-Known Member

    Joined:
    31st Jul, 2015
    Posts:
    208
    Location:
    Australia
    In a downturn housing market, LVR may turn out to be exceeding 80% if bank decide to conduct a valuation on existing mortgages.

    In that case if bank may asks customer to reduce the loan to bring LVR to 80% (or buy LMI) and if consumer is unable to do so, can bank sell the property to mitigate their risk even if the customer is meeting all repayment obligations?

    Is this correct?

    If bank continues to hold it increases the risk for them. Right?

    Owners from perth's mining areas may have experienced this.
     
  2. Morgs

    Morgs Well-Known Member Business Member

    Joined:
    7th Dec, 2017
    Posts:
    519
    Location:
    Sydney NSW
    Why would the bank want to do that?
     
  3. Sackie

    Sackie Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    13,707
    Location:
    Bondiliciously Beachy
    Highly unlikely to see residential loans being recalled unless fraud was involved or mining town disasters. During the RC some loans were recalled due to fraudulent documents. Basically a superficial show of action to the ASIC and APRA gods , who now thankfully are slowly becoming but a footnote in history until their next hurrah.
     
    Last edited: 13th Oct, 2019
    Shazi likes this.
  4. property_geek

    property_geek Well-Known Member

    Joined:
    31st Jul, 2015
    Posts:
    208
    Location:
    Australia
    The reason bank lends money only 80% of property value(without LMI) because they want to keep buffer of 20% towards selling cost (in case they force sell property due to repayment defaults etc).

    A higher LVR (without LMI) increases the risk for banks.

    If a customer defaults on repayments while mortgage is 80% LVR, bank won't lose any money should they force sell the property. (Because of 20% buffer).

    However, if new LVR becomes higher let's say 100% (in downturn market it is totally possible) and then if bank had to force sell that property due to repayment default then bank will lose money because now they don't have 20% buffer to cover selling cost.

    So bank would always want to maintain a buffer (at least 20%) at any point.
     
  5. Sackie

    Sackie Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    13,707
    Location:
    Bondiliciously Beachy

    If a bank has a reputation for recalling all loans that break an 80% lvr, they'd lose a huge amount of business overnight. Won't happen.
     
    Shazi likes this.
  6. property_geek

    property_geek Well-Known Member

    Joined:
    31st Jul, 2015
    Posts:
    208
    Location:
    Australia
    I know in general breaking a small %age higher of 80% wouldn't trigger anything.

    What if LVR keeps getting higher and banks see them heading to a point where customer may willfully defaults on payments.

    Banks can foresee that and take necessary precautions. They may suffer a reputation damage (if there is at all) but can avoid a total business failure.
     
  7. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    2,514
    Location:
    Australia
    Didnt happen in the mining towns, perth, gfc, brisbane, darwin etc if the borrower made the payments on time.
     
    Last edited: 13th Oct, 2019
    Shazi likes this.
  8. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    2,514
    Location:
    Australia
    Except they havent.
     
  9. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    3,082
    Location:
    Mt Druuiitt
    Could a supernova change the trajectory of an asteroid the size of your average 3 bedda in the Druitt and force it into the Earth's atmosphere where it's reduced to the size of an NRL ball and, slipping through Jarrod's hands, it bounces into and demolishes a backyard garden shed full of plants?

    No, I have never heard of a residential loan being recalled where the mortgagee didn't miss repayments. Matter of fact, they didn't bother recalling my loan when I missed a few during the price crash of 2008ish lol.
     
  10. Terry_w

    Terry_w Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    22,648
    Location:
    Australia wide
    If you breach the loan agreement they could ask you to repay the loan or rectify the breach.
     
    Shazi likes this.
  11. See Change

    See Change Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,104
    Location:
    Sydney
    It can and has happened in the commercial sphere . Someone I know , who had never missed a payment and had multi million equity was bankrupt during the GFC when this happened to him .

    Cliff
     
    Luca likes this.
  12. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    15,235
    Location:
    Sydney or NSW or Australia
    All the more likely with commercial lending especially where there are annual reviews, mortgagee approval of leases etc.

    I had negotiated a new lease for a client which was not in line with the option (which they could not exercise). After much negotiation, we agreed something less on a longer term which satisfied the bank (and the lessor).
     
  13. croseks

    croseks Active Member

    Joined:
    9th Oct, 2018
    Posts:
    41
    Location:
    Melbourne
    I don't think that anything is guaranteed, as long as you are meeting your payment obligations I don't expect the bank would suddenly margin call your loan.

    However, what if the bank was going under? I don't actually know the answer to this but I am sure it could happen in desperate times.

    Either way I think in the worst case scenario you would just have to prove that you can meet your obligations (for example by way of showing that you have a years worth of mortgage payments in savings, or other assets etc...)
     
  14. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    508
    Location:
    QLD
    Unless the property is a commercial property then no.
    I've never known a bank to complete a full valuation on a residential property just because they think the market is tanking. They would be shooting themselves in the foot if they did
     
  15. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    2,514
    Location:
    Australia
    What happened to borrowers when rams went bankrupt in 2008?
     
  16. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    508
    Location:
    QLD
    I believe the opposite would be true if a bank was going under, a loan that is being repaid on time and correctly is an asset not a liability, selling the property for less than the loan balance would be a bad idea for a bank trying to sell it's existing business
     
    croseks likes this.
  17. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    4,936
    Location:
    Melbourne, Nationwide
    Residential loans have a number of protections around them. As long as you're meeting your obligations, you're probably not going to have an issue. I know plenty of people with properties in certain locations that are deeply in negative equity and have been for years (mining towns and a lot of WA locations). They make their repayments and the bank leaves them alone.

    It is possible with commercial loans, I've heard of it but never had it occur to a client. One easy way to avoid many of the problems is to use lenders that don't conduct 'annual reviews'.
     
  18. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    10,141
    Location:
    Sydney
    Within each bank is a team assigned the role of risk management for any portfolio of loans. They act using a range of measures to ensure the bank isnt absorbing risk on its book by focussing lending on a specific risk element of the market (eg people aged 59 about to retire, property investors !! etc). The portfolio comprises a blend of OO and business and investment property and within geographic regions by post code, borrowers age and even occupations etc. They also use hidden stats like debt to asset ratios etc. They look at the portfolio and within geographic and other focus specific groups. They tweak this from time to time. eg Westpac stopped lending to non-residents some lenders pulled back on OTP apartments or specific postcodes. In the boom times they appear to have failed to manage their risks and APRA now review it closely. Regulatory caps can be imposed by APRA but they tend to report risks and then each bank quietly tweaks its policy in return.

    If a market event sees values fall the bank may move from a passive management to one that is more active. Usually called an impaired loans team. eg stopping lending to certain groups they see as at risk. They may identify those at risk loans and monitor them using other statistical oversight. They may engage valuers to measure actual risk. All loans are monitored against bad debt KPIs. 0% is the target but it can be higher. The bank may set a upper limit on a specific risk and will budget for its potential to impact profit. It may write down its book accordingly. If they see risk indicators trigger on any specific loan they may make customer contact and seek ways they may avoid the loan becoming high risk or ...bad. But if the customer is making payment etc they will typically just monitor.

    While loans are being paid the lender wont generally seek to harm the borrower and its own reputation. APRA reviews all these matters.

    Commercial loans tend to have covenants attached which allow annual review or impose specific KPIs such as profit, sales etc. I have seen several nasty bank acts to call up this style of loan and they can do it in an aggressive way without warning. One listed the business land and buildings for sale - to a competitor. Immediate legal action in each case was able to avert difficulty. In two cases I can recall the companies deliberately appointed a friendly administrator to hinder the bank while the matter was reconstructed and resolved.

    Lenders can securitise and sell a portfolio of loans to an investor. This way the bank can realise a known loss and allow a third party to action any further loss or receive any gains from bad loans that revert to good loans.

    This is a good CBA disclosure document on how banks manage their internal risks on the APH website. It also addresses the Bankwest mess when CBA attempted to clawback poor performing loans contrary to APRAs views
     
    Blueskies and Hulk like this.