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Thursday, February 11, 2010

Ever heard of Scooby loans?

'Scooby loans' could be the latest term to creep in the everyday landlord vernacular if the reports by the BBC are anything to go by.

A 'scooby loan' refers to a loan against a commercial property which is 'underwater'. In other words in negative equity. Because the historically low interest rates many landlords are still able to service their debt despite this situation. Why Scooby loan? The term likens a landlord to a scuba diver and the fact that they are 'underwater' but still breathing.

In the short term this situation keeps the lender happy but also only delays the pain of having to take a loss on their loan. Meanwhile both landlord and lender keep praying that property prices will recover significantly so that the landlord is no longer in breach of there loan to value covenants. (Most buy-to-let lenders thankfully do not have these as a condition of their loans).

However, given the state of the property investment market is still fragile many of the commercial loans will not recover from negative equity. Therefore the reality is that eventually the landlord or lender and probably the latter will have to take a hit to their balance sheet when the loss is capitalised.

In otherwords just like landlords sitting on portfolios with large amounts of negative equity it could all get pretty SCARY pretty soon.

OIKS Shaggy get me out of here!

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