Source
r/AusFinance•
_postcode3000_

Negative equity

Investing

With all this talk about apartment prices dropping in Melbourne up to 40%, I'm assuming that some of these will be negative equity.

If you are one of these people that sold, how does the bank recoup the remaining loan value? Do they take you to court? Just curious.

Edit: furthermore, if there was a large scale financial crisis and lots of people had negative equity and had to sell, the bank would become insolvent. Does that mean everyone can get away without repaying the bank?

Posted Apr 22, 2021, 12:11 AM UTC · edited

2547
knob80•

Individuals will be taken to court and made to file bankruptcy if they cant repay the difference between selling price and loan outstanding

30
podestai•

Even if the repayments can be continued to be made?

12
katienank•

If they’re keeping the property and maintaining payments, then it doesn’t matter whether they have negative equity. It’s only if they’re needing to sell for some reason that negative equity may become a problem if they can’t fund the difference between house value and mortgage balance.

24
knob80•

So long as repayments continue to be made then there will be no issue with forced sales.

There are some loans (mainly for investment properties) which require a loan to value ratio to be met. In cases where property values falls, the banks will require a top up mortgage repayment. Where the individual is not able to provide the top up, that's when things get dicey and banks may force sell the property to recoup their loans. And if loan balance is above the sale price, that's when bankruptcy can happen.

14
tuggertugnuts•

Other comments not necessarily right - banks generally have the right to pull the loan if they don’t believe the security is adequate. It’s rare though because it’s bad business in the long term (bad PR, ombudsman action and complaints, expenses of working through a default/forced sale are material)

6
BAA87•

This is right. They basically never follow through and chase the borrower personally.

2
BAA87•

This respond is straight up wrong and shouldn’t be the top comment.

I used to work in the mortgage recovery space working for most of the large banks in Australia.

Look the comment by @its2019now below for what actually happens.

1
Risk_Analyst_CFA•

It's unlikely the regulators and governments would allow banks to become insolvent due to their systemic importance. If a smaller bank is on the brink of becoming insolvent the regulator would likely for a merger or force a big 4 to buy them out.

Also worth noting that the house prices would have to drop 30% or more for banks to start making losses, and probably more like 50%+ for it to be severe enough to cause insolvency. But one important understanding is that house price drops themselves aren't enough to cause banks stress. It's the unemployment rate that would be the issue. If house prices were to drop in isolation (unrealistic, I know) but everyone is still employed and servicing their debt then the banks don't have any issues. In this instance, house prices could drop 99% and it wouldn't matter.

23
HeadShot305•

Even in the doomsday scenario I don't think the BIG4 would need much convincing to buy a struggling small bank.

6
unspecifiedreaction•

What happened to the 4 pillars policy?

At least let Bendigo and Macquarie buy them out

1
Risk_Analyst_CFA•

Bendigo Bank wouldn't have the balance sheet to buy anyone out, not in a stressed environment. Maybe a merger with Bendigo? Bendigo merged with Adelaide bank during the GFC because Adelaide bank has massive exposure to wholesale funding channels (that dried up during the GFC) while Bendigo bank used mostly deposits (which weren't impacted).

Macquarie could be an option, sure.

2
its2019now•

Ok, So I work in this space so have a good understanding of it all. If there is a shortfall at settlement the bank can still proceed with you to sell the property. The 100k in your scenario could odd a few things.

  1. If the loan is mortgaged insured as per the contract then the debt is passsed onto the insurers. They usually set up a payment plan with you for an ongoing time or offer you the chance to pay say 80k upfront and they write the difference off.

  2. If it’s not LMI insured the same as above is done but it’s just done in house. So either a payment plan or a write off.

  3. They ask you to take out an unsecured loan if the shortfall is not that great.

  4. I have even seen on many occasions pending the scenario that the residual debt is released.

16
BAA87•

Thank you for putting out some good information. I used to work in this space as well and totally agree with your comment.

4
crappy-pete•

See below for correct process

9
its2019now•

That’s BS and not the case at all. Where do people make this stuff up from. It’s crazy.

6
crappy-pete•

Brilliant. And what is LMI for?

I'm literally saying the same thing as you in another post. The bank passes it to the LMI provider, who then chase the borrower for the debt.

0
Phobicity•

Nah, there's distinct differences between what you and he said:

  • Lender's don't insure every loan. They may hold reserves or capital against loans internally or reinsure loans with higher risk.

  • LMI provider's don't chase you up for the shortfall. There are cases where a payment plan may be put in place, they may sell it to collections, or even just write it off.

Taking CBA for example.

For policies where there is a less than 20% deposit, they would internally mitigate risk through their own Low Deposit Premium Scheme.

If the policy has less than 20% deposit and is deemed too risky for their internal risk mitigants, they would still consider going through an LMI provider.

They would then consider all loans with more than 20% deposit, if there are any attributes that make them riskier, perhaps employment status or location. Those would go through a reinsurer, perhaps LMI.

3
crappy-pete•

Cheers, I was obviously under the impression lower lvr loans were always insured

I still think we're saying the same thing regarding chasing and payment plans. They chased you for the money, you came to an agreement and have gone on a plan. Semantics maybe.

1
Extra-Height4001•

100% wrong and insane this is attracting upvotes.

The banks manage their own risk on sub 80% LVR loans, and model

a) of all their loans, how many still have 20%, 60%, 70%, 80% etc owing, of these how many are investor, owner occ etc.

b) in a potential downturn of Y% in certain areas, how many properties would be underwater

c) Of these, in how many cases would the owner stop paying vs. just wear the bill

d) Of these, how much of the $ could the bank ultimately recover vs, be stuck with the bill for.

The banks then keep capital reserves to allow sufficient buffer to accomodate a "worst case" scenario, with the implied assumption if we see bigger downturns, they will need to raise more capital, or if they cannot, the government will need to bail them out.

They do not buy insurance for this risk, they are in the business of taking (measured) risk.

Source: worked on mortgages in a bank and am familiar with their processes & financials

4
_postcode3000_OP•

And for loans without LMI the bank does the chasing?

3
hypoglycemic•

All loans have LMI. When you ask the bank (lender) for the loan, if you meat certain criteria (total amount of money borrowed vs deposit etc) the lender will pay the premium on your behalf.

11
Extra-Height4001•

wrong.

3
crappy-pete•

Which lender doesn't insure their loans?

5
_postcode3000_OP•

Where LVR is less then 80%?

1
Grantmepm•

The cost is just less visible.

9
palsc5•

They insure every loan, it's just at the higher lvrs that borrowers pay the cost

From the original comment

7
potatodrinker•

If someone had a $500k loan and sold the property for $400k, does the outstanding $100k (lets ignore transaction fees for simplicity) stay in the loan to be repaid over time? Curious how this works...

6
katienank•

No. The bank will refuse to release the mortgage and you will not be able to settle. You need to pay the shortfall between sale proceeds and mortgage amount to the bank.

27
potatodrinker•

That makes sense. Thanks

2
its2019now•

Not always correct. I’ll write a post shortly

1
Kazerati•

Usually the vendor will need to organise another loan (like an unsecured personal loan) to discharge the mortgage.

4
stewface3000•

Not to many people will sell. For this reason. Maybe some invested with multiple investment that can cover the lose. But likely people will just hold fast. I guess the people that get hurt in this are young family or couples trying to upsize to a larger home. If you have negative equity then you have no choice but to stay.

4
Icy-Factor-407•

Not to many people will sell.

If not too many will sell, prices would not have fallen up to 40%.

4
zephyrus299•

You're assuming there are any buyers. A lot of these places are student housing (think tiny studios) so no prospective tenants and very unlikely to be owner occupied.

1
maton12•

Often there's another asset that has some equity.

Plus just cause there's negative equity, won't mean that everyone will sell

1
[deleted]•

[removed]

1
Kazerati•

Usually the vendor will need to get another loan (unsecured) to pay out the mortgage. Is that’s a problem, then you’re looking at further action.

1
MellyO2017•

Could someone please ELI5 for me. Why would apartment prices be dropping and yet house prices are increasing at such a high rate?

I'm not understanding how the prices increased so much when immigration has been on hold for so long and people from other countries with lots of money can't live here right now....

1
SignalGlittering4671•

Apartments are not as desirable as a free standing house.

Apartments take longer to build, so how many are being build vs how many is needed lags by 2 years from memory.

Supply grows, demand is falling.

Aussies returning from abroad.

All of this is highly dependent on where you look at prices, shitty shoe box apartments in the city vs nicer ones in the burbs.

(Edit) Low interest rates and it was hard to do anything doing Covid besides saving up, with a sprinkle of FOMO.

2
MellyO2017•

Thanks for your reply! :)

1
preece46•

Wonder if this issue is compounded by the fact that rentals will now have stricter requirements to fix electrical problems (power points, light fittings etc) and perform regular servicing on gas and/or electrical services?

Link for reference: https://www.consumer.vic.gov.au/housing/renting/changes-to-renting-laws

1
HyperNormalVacation•

I would say these apartments are too new for those requirements to be a big problem, unless build quality is rotten.

No I would say those new requirements will be smashing the low end semi and detached investors.

1
HyperNormalVacation•

What we have to ask now is: who is still buying off the plan??? Is that it for new apartment sales in Melbourne?

1
_postcode3000_OP•

https://www.domain.com.au/news/wont-be-able-to-give-them-away-investors-offload-empty-inner-city-apartments-for-losses-of-up-to-40-per-cent-1046214/

Not sure if they are off the plan or not

1
cookie-beast•

Love how student accomodation shoe boxes are now classified as “apartments”..

1
eptftz•

Typically what happens is that you’re simply unable to sell unless you can make up the shortfall, you’re trapped in the mortgage. Banks generally won’t do anything as long as you keep making repayments because forced sales just make the problem of negative equity worse and they want to protect their other mortgages.

People need somewhere to live so most people keep making repayments at the expense of all other expenditure.

1
[deleted]•

[deleted]

1
silversurfer022•

Lol the bank doesn't care about the prices, you owe them the same amount regardless. You are not repaying one cent less unless you declare bankruptcy.

1