Sunday, June 28, 2009

Mortgages - As safe as houses

Several years ago, I was interviewing the management of an Eastern European Bank. Only thing was, they were not Eastern Europeans, but Western (not sure it really matters which part of the EU they were from), seconded from the parent bank. They clearly rated themselves amongst the best their country had to offer.

I questioned them closely, as any good fund manager is supposed to do, and it became apparent that they fully intended to get even more heavily concentrated into consumer loans, especially mortgages. They proudly told us that they were starting to introduce FX mortgages - Euro and Swiss Francs, if I remember correctly.

I questioned them closely about their risk control and suggested, as politely as I could, that maybe they were being a little optimistic. I could tell that they were getting irritated with me, as were several other managers present. They again insisted that they knew what they were doing, after all, they had years of experience in consumer lending in their domestic market, and no country had ever suffered a banking crisis due to mortgage lending.

"Mexico in '95."

"What about Mexico in '95?"

"A country that destroyed its banking system through bad mortgage lending"

"If you think X Country is like Mexico, you know nothing...."

"I never said it was like Mexico, but if you knew anything about consumer lending, you would have known the dangers of stupid mortgage lending"....

You get the idea. Not my proudest moment as a fund manager.

I got to thinking about this as I read about the proposed merger between Emaar Properties and several other Government backed developers, Sama Dubai, Tatweer, and Dubai Properties, or variations on that theme.

When interviewing these companies, I never got into a slanging match, but there was always a sense of irritation if you were anything other than fawning.

When I went to look at the property market in the Gulf, following the emergence of the listed developers, it was my first visit in several years, and my first since I had lived there in my 20s where I could really dig around, rather than getting whisked around from meeting to meeting in a taxi.

All my friends who still live there told me that there was a huge issue with build quality; poor quality materials used, shoddy workmanship, and incompetent designs.

When I bugged total strangers about the property boom, they reiterated the same quality concerns. When I questioned both Emaar and Aldar about this, they recognised that there were issues with the other developers.

Several friends also questioned the quality of the buyers as well. It would appear that many of the more prestigious properties were "sold out", but the properties remain dark for years. There are a plethora of conspiracy theories, from never actually having been sold, through Russian money laundering, to Iranian Revolutionary Guard money laundering. All and none of which are probably true.

In 2008, the wheels started to come off the bus.

Some properties had not been build, despite the developer having sat on 100% deposits for several years. High inflation meant that the properties could never be delivered at the agreed price, so buyers were offered the choice of getting their money back, sans interest, or forking out even more money to take delivery - eventually. Other problems also emerged.

To bring this full circle, the local banks in the Gulf had been massive lenders, one could even say excessive lenders, to the property sector, despite all the obvious problems.

Although the mechanisms were somewhat different, the end points where the same: Real Estate undermining the banking sector.

We think of the current crisis as a derivatives problem, with all those ridiculous AAA rated structures, CDSs, etc; We think of it as an Anglo Saxon problem, with excessive risk taking in the US and UK; We think of it as a bad oversight problem, with H.M.Treasury and the Fed asleep at the wheel.

But it is bigger than that, and that is my worry.

Luc Vallee has pointed out, there are still massive refinancings to come in the US; Gordon Brown has strenuously refused to make ANY of the necessary cuts to the UK budget; and Japan is doing what it does best, nothing.

How many of the changes that have taken place in the leadership of the World's nations and corporations are genuine changes, and how many are no better than rearranging the deck chairs on the deck of the Titanic? So many of today's financial problems are related to what appears to be trans-national group-think; and the "Group" is still there.

Merging a whole load of Government backed property companies will not fix the property market in Dubai if the excess supply is not addressed; Pumping billions into failed car companies around the world will not work if there is still excess supply; and at some point, printing money will not solve the World's problems if there is excess supply.

Having blown everything else, will the "Group"get it right this time?

1 comment:

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