Comments on: 7.30 Report on “American mortgage shock waves hit Australia”

By: Miner

Miner — Mon, 10 Sep 2007 22:07:51 +0000

I agree that there may be a pretty big systemic error in the valuation of the banks books. However I disagree with cray on one point, it is not the responsibility of the valuers to keep the market down.

The valuations are opinions only. There may be a sound analysis backing it up, but at the heart of any opinion or valuation is a bunch of assumptions and biases, some known, some unknown (que Donald Rumsfeld).

Valuers can only use assumptions that they feel are valid for the current market - however they should understand the sensitivities of their valuation to changing variables. I hope the banks do this, and would be very surprised if they did not.

That said, if the assumptions are erroneous then all the fancy mathematics that follow count for nought.

What concerns me is that the whole edifice is held up by the easy credit binge that supports home buyer’s confidence. If the confidence is shaken enough that people decide to delay purchasing, the impact on the market (and assumptions that underlie valuations) could, and should, be significant.

What impact does the relaxing of reserve requirements have on the banks behaviour (other than allowing increased credit expansion)? Would the banks be able to hold on to, or restructure, untenable loans for longer if the market has a significant correction or bust? I am not sure exactly how the current reserve calculations (I think they are risk based as opposed to a set % of deposits) are conducted, but is there a strong incentive for the banks to say the book is secure to avoid having to hold increased reserves?

Cheers

By: cray

cray — Mon, 20 Aug 2007 01:32:15 +0000

Dave,
Yes I have had some concerns about this for a while, and I believe you have hit the nail on the head.

“If the whole asset category is overvalued then these valuations wonâ€™t pick that up. The banks therefore are probably highly exposed and not even aware of it.”

From what I understand valuers and banks work together, if valuers were to remain conservative in their estimates and not increase valuation to continually ‘match the market’, banks would not be able to lend on properties or would call them ‘overvalued’ assets.

If this had happened (valuers being conservative) over the last 5-6 years we would not have had the great home price boom we are suffering now.

PS - checkout GHPC for more serious (and not so) comment about these and other issues.

http://forum.globalhousepricecrash.com/index.php?showforum=9

Sorry Steve, I’m sure you dont mind.

Chris

By: Dave

Dave — Sat, 18 Aug 2007 08:05:33 +0000

Apologies if this is lodged twice - had a technical hickup.

I as curious by this comment from the banking industry in the story –>

DAVID BELL: Yes, there have been pockets where people’s housing values have slipped. Of course we’re worried when people have negative equity. Again, I can only reflect on our total book, and our total book shows that the level of impaired assets remains very, very low.

I was wondering how a bank calculates ‘total book’. The debt is easy (outstanding debt) but the value of the assets against that debt is clearly subjective. I suspect if is just the sum of all the individual ‘valuations’ that are done on property at the time of taking out the mortgage. These individual valuations are generally done by looking at other recently sold properties. If this is the basis of ‘total book’ then the banks are putting a lot of faith into the efficient market hypothesis. If the whole asset category is overvalued then these valuations won’t pick that up. The banks therefore are probably highly exposed and not even aware of it.