Entertainment & Music The Big Short Movie

LRBA Limited Recourse Borrowing Arrangement. Quite different to non recourse lending.
The bank only has recourse against assets within the SMSF, but does not have recourse against the SMSF members personal assets.

Nothing to be scared of, especially at 70% LVR- 80% LVR and very tough servicing requirements. SMSF loans are the lowest risk, highest yielding loans a bank can write...and the stickiest. so therefore the most profitable. In spite of that, they barely write any of them at all. It's a tiny tiny tiny market in spite of all the bluster from people here and elsewhere . Extremely tiny in fact. So tiny that the banks can write all thir SMSF LRBA loans against balance sheet and dont even need to securitise them.

 

Yeah SMSF lending is extremely tight compared to normal borrowing. It's a very complicated process and a very new product line. With the way it works I'd agree it would be one of the lowest risk, the rules basically enforce a great LVR for the bank.

 

Thanks for explaining it to me.

I haven't seen the film yet, but I thought buying property in an SMSF could be our silent sub prime issue just waiting to happen.

 

Seeing this show this week and i can't wait it seems so exciting...by the look of it...I will probably go watch it twice!

 

Saw it in Lux on Saturday night with the wife who hates anything that requires thinking and even she enjoyed it. I must say I used the line "It has Ryan gosling and Brad Pitt" to trick her, so she was initially a bit upset with how they looked. Haha

Definitely going to watch again as I missed a bit. I think an understanding of stock markets (which I know nothing about) would help make more sense of the movie. That being said I found myself shaking my head at times as to the awful things the banks, brokers, rating companies.etc were up to.

Cast were all brilliant but again have to give the cake to Christian Bale. When he is not yelling at sound guys boy can he act!

 

I have not seen the movie but it is on my to do list. I decided to read the book first as I have found in the past it tells the story in more detail. I enjoyed the book, it is certainly an eye opener.

 

Um, this is not really suitable for work but, go see it...

 

Christian Bale got the look of Michael Burry pretty close in the film. The photo, below, is from Vanity Fair's extract from The Big Short.



The reason that the protagonists were able to make such a killing is that the odds of a massive default were seen as being very low. Burry was viewed as crazy, but proven to be right.

I'm not convinced that the Big Four banks are any safer than Wall Street was prior to the crash. ABC reported last year:

In a media release this morning, the Australian Prudential Regulation Authority (APRA) announced that it would require an average mortgage risk weight of 25 per cent on residential mortgages, up from the current average of around 16 per cent.

The change applies only to the four major banks (ANZ, CBA, NAB and Westpac) and Macquarie Bank, which are the five institutions currently allowed to set their own mortgage risk weights.

There's also a video here on the story.

Or to put it another way, they were allowed to hold substantially less risk capital against mortgages than their smaller rivals based on internal metrics. Yes, I could see that holding up well in a financial crisis...

 

Paul Mason, the economics edition of Channel 4 in the UK, wrote an article about where a big short would take place today.

His thoughts were shorting the China stock market, though there's a political risk there, or a break-up of the Euro and EU due to a suspension of the Schengen agreement because of the refugee crisis.

I reckon he's looking at more obvious possibilities. As I said before, the short paid off big because those who won took what was (without the benefit of hindsight) considered a hugely unlikely position.

 

This is a good point. I am aware deregulation in this area occurred back in the 80's. The banks in comparison are still well regulated - risk of a disaster due to a liquidity dry up or the banks being unable to service their own loans or needing to recall a bunch of loans to deleverage seems low. I still can't see something like what happened with the sub-prime debts in the US happening in Australia. I'd be interest if anyone did have an opposite view.

 

i found it quite depressing 8 million people loss their jobs and 6 million were made homeless within a short period of time

still must watch movie

 

I saw it tonight with my oldest son....really enjoyed it.

EDIT: And; having recently bought another future PPoR property (with tenant in place) and experiencing the myriad hoops we had to jump through to get the finance approved; we do not have anywhere near the same flagrant disregard for "qualifying" borrowers as the US did leading up to that GFC event.

 

Brilliant movie

 

I need to watch that movie again, the first time was for a general understanding and entertainment. I think I may gain some more insights second time round.

 

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This is not an 'opposing view' as I don't think that Australian banks will be forced to recall any loans, but I want to add a few points which seem apply to Australia at the moment.

A couple I know, (bus driver and part-time supermarket worker, no disrespect to bus drivers or the people working in supermarket) sold their apartment and have laid down $1.3m for a house and $400k of an IP. I thought of this couple when the stripper in the movie worried about refinancing her 5 houses.
- We may not have shadow banking system that created the CDOs and CDFs etc. It is worth remembering that the crisis was not brought-about by the CDOs and CDFs it was exacerbated by them. But we do have house prices that have diverged from the fundamentals.
- The housing market in the US collapsed because people couldn't refinance to keep paying low rates.
- it is likely that investors that are negatively geared may not be able to refinance and may have to pay principal and interest, in an environment where it may not be possible to increase the rents.
- Refinancing can dry up quickly because it depends, largely, on increasing property values and lender competition. In a bear market, not many lenders will be willing to increase their exposure to borrowers who are refinancing to keep their loans interest only.
- Housing loans are by far the largest asset class Australian banks have any adverse shocks to housing is likely to affect the banks and their cost of funding inturn the interest-rates.
- In a downturn the households/individuals with high debts reduce spending at a much greater rate, which can turn a mild downturn in to a deeper and longer episode. Australia seems primed for this kind of scenario to unfold.

 

Some excellent points to think about.

Hypothetically, what do people think the tipping point would be in Australia? In the US and movie it was a CDO bubble, investments said to be low risk but instead actually super high risk.

 

Cheers @tivinium,

Tipping points are only obvious in retrospect.

The biggest cause for concern here, in my opinion, is the oversupply of apartments in capital cities putting a dampener on values and rents. This could lead to some investors not being able to get the finance for OTPs upon completion due to Higher LVRs a stricter serviceability criteria.

Some overseas investors may not be able to settle their OTP purchases on completions due to capital controls. There are stories coming out of London about this one.

 

There's no residential mortgage debt if they cant settle an OTP purchase .... so it's a different beast. Possibly a little ugly for buyers who may lose their deposits, and it may place downward pressure on rents, but provided Australian's with settled loans that are underpinning bank RMBS , continue to pay their mortgages and we dont have a massive run of delinquencies, there wont be a massive collapse in prices here nor bank insolvency

We should always remember that Australian loan contracts allow for recourse where most American loans did not, so even if delinquencies rose here, there are things like mortgage insurance or legal action available to banks to recover some or all of the debt. There are really no circumstances imaginable in Australia whereby the underlying RMBS would become "junk" or completely worthless, leaving our banks unable to fund their operations.

Nevertheless, APRA sees significant risk in the banks carrying an overweight/disproportionate amount of I/O debt which will never actually be paid down, especially in a low rate environment that will one day rise , with inadequate capital set aside for the "what if" moments ..... so we are now seeing more robust capital requirements being introduced and a 10% speed limit on INV lending, and BASEL IV will build on that through 2017/18 - which will mainly centre around requiring banks to move from short term arrangements ( 90 day swaps) to medium term arrangements ( at least 12 months) - the result of which will be another rise in rates for investors.

There's going to be no return to the heyday of borrowing vast, almost unlimited amounts of money to drive prices ever upwards, any time soon... meaning that the borrowing capacity "speed limits" we continue to read about on here, arent going away.

if you are buying in Sydney, you need to take a 10-15 year position

 

Saw this yesterday it is one of the best movies I have seen for a long time.

Initially I thought it may be a little boring, far from this, riveting, had me glued. Brilliant actors, witty dialogue, I don't mind the odd 'F' word in the right context.

MTR

 

That sounds like BS. Are you saying that 2 people on about $120k combined pre-tax income got a $1.7m loan?