I am surprised this thread did not get more attention than it did maybe too far outside the box. You just don't hear this stuff outside major Investment, 'Special Situation' or Bond Funds or at high level bank circles such as CFO etc.
I should add my source was very reliable and I only want to verify - and to see if anybody else knows about the virtual 'margin call' clause in the Australian mortgage contracts?
The source handled the set-up of a Euro1B Fund last year, yes I do not lie it was approximately Euro1,000,000,000. It was set up as a distress fund - a 'vulture fund' if you prefer because this guy made his name up in the Asian crisis and was buying properties off 20 different banks that had to offload urgently due to balance sheet issues. Really serious issues and any of you that have been following Basel2 and the upcoming Basel3 will know how strict this new regulatory environment will be.
This is setting up a perfect property storm. Big 4 Aust banks exposed 60% of their loan books to residential property - and which bank went for market share at the top? Look at the converging waves and consider the potential outcome...
- top up clauses for negative equity and few recent property buyers can afford this - the mortgage insurance will not be enforceable if loans are in negative equity - many loans already in negative equity ...and falling prices exacerbating this situation - interest rates pushing up the pressure to default - employment soft = more potential defaults - higher interest rates making it harder to borrow - banks constricting (carefully huh!) loans due to over exposure to the sector using tougher qualification guidelines
Do you get the senior level this data came from guys?? Head of structured products over Australasia for a major international bank.
Can start a Euro1B fund with bank and wealthy investors as the investors. Interestingly a bank that failed one of the stress tests in Europe proceeded to buy out the management company they set up to run the Fund because it could not get funding cheaper than 8.5% - was effectively out of business... It needed the control of the cash to re-balance their balance sheet :-(
Has direct experience of setting up Vulture Funds - was buying property in the Asian melt down at 20% in the dollar on the debt and that reduced as the crisis deepened.
Would love to see discussion on the mortgage and mortgage insurance contracts because we could see an Asian crisis level event in Australia if this guy is right. The RBA and Westpac had to go to the Fed in 2008 for emergency funding and crowding out can force rates up very high for all the wrong reasons - anybody who understands the debt markets and counter-party risk will know what I am talking about. Very sorry this is too long.
Let me put it this way the more you know the more you worry. But the greater the opportunity - buy knock down distressed assets at the right time and you will make a fortune as conditions improve but you will have to hold for a fow years - you will have to hold cash when it happens forget finance in conditions like I am suggesting might occur :-)
