Banking: Toxic Debt Write-Downs

[Stu Dent]

Everyone knows that we are in the midst of a huge recession caused by sub-prime lending. This 'toxic debt' has resulted in many banks writing down (writing off) billions of pounds worth of debt owed to them.

My question is: how much can an individual expect a bank to be prepared to lose on a repossessed property? If I see a house on the market for �120k and the bank are owed �120k then although the bank would love to get all their money back, recent news would suggest they are prepared to take a hit. Does anyone know how much of a hit they might take in percentage terms?

[dzug]

Can't answer your direct question - but it could be quite a bit. Don't forget that the debt doesn't go away when the property is repossessed, so they can carry on pursuing the debtor. They can also sell on to a debt collection agency who can be quite forceful.

[sandmaster]

The banks must obtain the market value of the property when they sell it. But market value is only what someone else is willing to pay. Very often such properties go to auction.
What the law tries to prevent is the property being sold at a low price to someone 'in the know' when higher offers may be available.

[Stu Dent]

Thanks for your answers, Dzug and Sandmaster.

I am interested in purchasing a property that I know has been repossessed. So interested, that I contacted the Land Registry and obtained copies of the title sheet to check was paid for the property and how much was owed on it.

I know that if the creditor does not get the debt cleared he can still pursue the shortfall but in most repossessions this won't be an issue as the debtor will have been declared bankrupt. It's certainly not an issue for me as the buyer. So the bank 'write-down' sub-prime losses. But how much? Even auctioned properties generally have a reserve price.

The bank can accept the highest offer they get but if that offer falls way short of expectations they are not obliged to sell. What I'm asking is, in percentage terms, what is the bank likely to find acceptable to write down?

[R1Geezer]

There is no percentage loss that the bank would deem acceptable, they would look at the prevailing market conditions and make a judgement. In reality they will take market value if they can. The amount owed on the property would not effect that decision unless they had some knowledge that prices will rise. In the current climate they would probably accept an offer of close to market value rather than sit on something that will only lose value. The amount owed by the previous lender is neither here nor there. Generally lenders go with the maxim that it';s better to lose a fiver than a tenner! They will of course pursue for the shortfall where they can.