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fixed mortgages should banks gain from their sub-prime fiasco

edited 27 March 2014 at 12:01PM in Mortgages & Endowments
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  • dunstonhdunstonh Forumite
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    I could be wrong but I was fairly sure that we had our endowment set up by a mortgage adviser who obtained commission but nobody else has jumped to tin foil hat mans aid on this this.

    yes, you are wrong for the reasons already given. Mortgage advisers are not investment advisers. Endowments were investment products and could not be put in place by mortgage advisers. Many of the banks/building society reps would use a mortgage adviser for the mortgage but introduce to an investment adviser for the endowment. Some investment advisers also did mortgages.
    The fact that the majority of the people who have stated there opinion are the very people who have been at the centre of this farce should not deter you from your complaint.

    There is no one on this thread who is part of the issue. There are plenty on this thread that dont have anything to do with financial services that think the reason for complaint is farcical.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • edited 29 March 2014 at 7:25AM
    PeacefulWatersPeacefulWaters Forumite
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    edited 29 March 2014 at 7:25AM
    We have an issue with a 10 year fix we took out in 2006, on 2 fronts.
    We have been in touch with the Woolwich and the FSA (now FOS ).
    The old FSA didn't handle complaints. That has been the remit of the FOS since before you took out your mortgage. How did your correspondence with the FSA end?
    When we took out our 10 year fix with the Woolwich we were obviously unaware, and would not expect, that the banks had been involved in a sub-prime lending ticking bomb which would affect future interest rates for the next decade. Our decision to take out the mortgage
    I don't think the banks were aware of what was to come either. If they were it compounds their stupidity several times over.
    At the time, 23rd august 2006, and I still have the documentation to prove this, the Woolwich was offering a better rate for a ten year fix than a 3 year fix and 5 year fix and better than their variable rate at the time.
    More than possible. Demand for ten year fixes tends to be weaker than that for shorter term fixes. Longer term swap rates can be lower. Product fees and ERCs can be higher, subsidising a lower rate too.
    How often will you see one lender offer a 10 year fix interest rate lower than their 3year or 5year fix.
    Sometimes. While it might not be the norm it certainly can and does happen.
    A. It has always seemed unfair that we have suffered by paying a higher rate and the banks have benefited as a result of their bad financial practices.
    It might seem unfair. But if a saver had opened a high fixed rate account at the same time I don't think it would be unfair on the bank having to honour it. In your case they raised long term fixed rate funds on the money markets and lent on to you. While doubtless they charge you more than they pay the rate they pay will remain fixed throughout. So in terms of your mortgage they have made no additional gain from falling interest rates.
    B. Did they know this was about to happen and where therefore offering lower rates to entice as many people in before the event.
    If they had anticipated the Credit a Crunch having anything like the significance it did they'd have reduced their lending to tiny proportions and widened their margins on any lending that did happen.
    Wikipedia states that the banks became aware of the sub-prime bomb in the summer of 2006.
    You can be aware of a problem but if you don't understand the size of that problem then you won't always manage it effectively.
    Do people think Woolwich knew and is it fair they have gained from the banking bad practise they were part of.
    They haven't gained. Their margin on your mortgage remains the same.
    We took out a ten year fix in 2006 because it would see us to the end of the mortgage on our home and we would be loan free at the end.
    A suitable mortgage product for your requirements then.
    That is how we are in the position where we have nearly paid for our house and never missed a payment, even though we were badly let down at the start (when we were green) by overpaid mortgage advisers telling us that endowments were the way to go, we all know that one.
    In 2006? Really?
    We were happy in the knowledge that if the interest rates dropped we would be paying more (this doesn't mean we wished this to happen) because as dunstonh correctly pointed out it gave us the security we were looking for.
    For clarity then, you believe your bought an appropriate mortgage.
    None of these comments, however, answer my original post.
    Really? Have you read them?
    Additional information
    In the Daily Mail on 24th January 2014 Mark Carney refers to the fact that prior to the crisis (when we made our decision) the interest rates were averaging 5%.
    So a 4.98% fix for 10 years was a perfectly sensible choice, especially as a 2 year fix and 5 year fix were 5.49%. and the SVR was 6.59%.... (I do apologise for not taking into consideration that Barclays Bank/Woolwich had been complicit in buying up bonds that included sub-prime loans)

    Since March 2009 the interest rate has been 0.5% (I know this is not the rate available before you tell me).

    Conclusion
    We have paid a higher rate than what has been available for the past 5 years (correct)
    The Banks have benefited from the disaster they created. (correct)

    In reply to dunstonh ‘Would you be saying the same if rates had risen and the bank thought it unfair that you were better off.’.... Look at the 6,700 borrowers who had West Bromwich B.S tracker mortgages that tracked the 0.5% base rate and then comment.

    So it’s OK for the banks to have their Bollinger and drink it.
    You appear to have sidetracked into rant mode. None of this will help you win at the FOS. You might not like banks and that's a view that you're entitled to.

    But you wanted a long term fix. It met your objectives at the time. Rates of similar long term fixes are much the same today as they were in 2006.

    Banks try to make a profit when they lend money. It's why they exist. The FOS are not interested in the margins. (but I will repeat that these margins remain the same for the term of your fix) but they may get interested in suitability of sale if you were advised. You've already agreed it was a suitable product.

    So when you cut out the side show you bought the right product at the time. It met your needs and gave you certainty. The lender has stuck to the terms and conditions. What are you complaining about?
  • The old FSA didn't handle complaints. That has been the remit of the FOS since before you took out your mortgage. How did your correspondence with the FSA end?

    I don't think the banks were aware of what was to come either. If they were it compounds their stupidity several times over.

    More than possible. Demand for ten year fixes tends to be weaker than that for shorter term fixes. Longer term swap rates can be lower. Product fees and ERCs can be higher, subsidising a lower rate too.

    Sometimes. While it might not be the norm it certainly can and does happen.

    It might seem unfair. But if a saver had opened a high fixed rate account at the same time I don't think it would be unfair on the bank having to honour it. In your case they raised long term fixed rate funds on the money markets and lent on to you. While doubtless they charge you more than they pay the rate they pay will remain fixed throughout. So in terms of your mortgage they have made no additional gain from falling interest rates.

    If they had anticipated the Credit a Crunch having anything like the significance it did they'd have reduced their lending to tiny proportions and widened their margins on any lending that did happen.

    You can be aware of a problem but if you don't understand the size of that problem then you won't always manage it effectively.

    They haven't gained. Their margin on your mortgage remains the same.

    A suitable mortgage product for your requirements then.

    In 2006? Really?

    For clarity then, you believe your bought an appropriate mortgage.

    Really? Have you read them?

    You appear to have sidetracked into rant mode. None of this will help you win at the FOS. You might not like banks and that's a view that you're entitled to.

    But you wanted a long term fix. It met your objectives at the time. Rates of similar long term fixes are much the same today as they were in 2006.

    Banks try to make a profit when they lend money. It's why they exist. The FOS are not interested in the margins. (but I will repeat that these margins remain the same for the term of your fix) but they may get interested in suitability of sale if you were advised. You've already agreed it was a suitable product.

    So when you cut out the side show you bought the right product at the time. It met your needs and gave you certainty. The lender has stuck to the terms and conditions. What are you complaining about?


    Perfect response, yet I doubt you will get any thanks as it doesn't fit with the OP's fantasy.:beer:
  • edited 29 March 2014 at 11:25AM
    jonesoswestryjonesoswestry Forumite
    63 posts
    edited 29 March 2014 at 11:25AM
    The old FSA didn't handle complaints. That has been the remit of the FOS since before you took out your mortgage. How did your correspondence with the FSA end?

    I don't think the banks were aware of what was to come either. If they were it compounds their stupidity several times over.

    More than possible. Demand for ten year fixes tends to be weaker than that for shorter term fixes. Longer term swap rates can be lower. Product fees and ERCs can be higher, subsidising a lower rate too.

    Sometimes. While it might not be the norm it certainly can and does happen.

    It might seem unfair. But if a saver had opened a high fixed rate account at the same time I don't think it would be unfair on the bank having to honour it. In your case they raised long term fixed rate funds on the money markets and lent on to you. While doubtless they charge you more than they pay the rate they pay will remain fixed throughout. So in terms of your mortgage they have made no additional gain from falling interest rates.

    If they had anticipated the Credit a Crunch having anything like the significance it did they'd have reduced their lending to tiny proportions and widened their margins on any lending that did happen.

    You can be aware of a problem but if you don't understand the size of that problem then you won't always manage it effectively.

    They haven't gained. Their margin on your mortgage remains the same.

    A suitable mortgage product for your requirements then.

    In 2006? Really?

    For clarity then, you believe your bought an appropriate mortgage.

    Really? Have you read them?

    You appear to have sidetracked into rant mode. None of this will help you win at the FOS. You might not like banks and that's a view that you're entitled to.

    But you wanted a long term fix. It met your objectives at the time. Rates of similar long term fixes are much the same today as they were in 2006.

    Banks try to make a profit when they lend money. It's why they exist. The FOS are not interested in the margins. (but I will repeat that these margins remain the same for the term of your fix) but they may get interested in suitability of sale if you were advised. You've already agreed it was a suitable product.

    So when you cut out the side show you bought the right product at the time. It met your needs and gave you certainty. The lender has stuck to the terms and conditions. What are you complaining about?


    Despite what Bond says (and he is still making snide little comments and wonders why he gets snide replies) I have replied to all threads with the level of sarcasm they were delivered.

    Thanks for a lengthy unpatronising response. Had others replied in the same way then no 'rant' or sarcasm would be necessary.

    In reply to how did your correspondence with the FSA end?
    FSA? surprised you brought this up in this way though as it would appear to beneath the rest of the thread. I corrected it to the FOS and this was a simple error that appears to give others some feeling of superiority, even though the same person told me FOS would not be dealing with, it when they are, and he brought forward information to back it up?
    They are still looking at it, my letter was sent on the 14th January and hasn't been thrown out at any stage yet.

    You don't think the banks were aware either.
    This seems to be the same as me I don't know either but many things happen we were not aware of.

    10 year fixes I still don't recall any other banks anywhere having lower 10 year fix than their 5 or 3. Unless someone can come up with proof of this it remains the same.

    I hold my hands up to the fact that they may not have made additional gains and did so in an earlier thread.
    As for the savers on a higher fixed rate account, they would have to honour this. Rightly so but this still goes back to what I have already stated. They created the issues.

    Most of the next few paragraphs appear to be along the lines of the did they know category, and if they didn't (which I have always stated I don't know either) then (as stated before) my second part kicks in how could I foresee it?

    Again as stated before I was happy with the mortgage prior to finding out about what the banks had been up to.

    I don't understand why you have an issue with the mortgage in 2006 seeing us to the end. This was our 4th fixed rate mortgage (as already stated) and when we finish it in 30 months time we will have done so in less than the the normal 25 years despite the bad start we had due to endowments.
    Our endowment was purchased about 1993.

    Again correct mortgage for how we believed the banks would be going about their business at the time.

    I had read them all 4 at that stage and thought it was a good time give additional information to save going over the same things over and over, completely got that one wrong.

    Your summary is 100% correct and clarifies what happens the only thing missing is mentioning that the banks moved away from many of the usual practices into ones that would prove disastrous for many many people. I don't place myself in that bracket however.

    Banks try to make a profit when they lend money. It's why they exist. Its a shame they forgot about this
  • dunstonhdunstonh Forumite
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    I corrected it to the FOS and this was a simple error that appears to give others some feeling of superiority, even though the same person told me FOS would not be dealing with, it when they are, and he brought forward information to back it up?

    The FOS will not rule on commercial issues. e.g. they wont deal with a complaint about the rate issued. The examples I posted were not commercial issues, although one came close.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • The FOS will not rule on commercial issues. e.g. they wont deal with a complaint about the rate issued. The examples I posted were not commercial issues, although one came close.

    taking away from the fact that you disagree with me which body should I have been making my complain to?
  • dunstonhdunstonh Forumite
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    taking away from the fact that you disagree with me which body should I have been making my complain to?

    Yes. You initially said the food standards agency. ;)
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • dunstonh wrote: »
    Yes. You initially said the food standards agency. ;)

    Should have known better than to expect anything different from someone who has to wear mittens instead of gloves.
  • Should have known better than to expect anything different from someone who has to wear mittens instead of gloves.

    Took me a while to work that one out but I got there in the end
  • edited 30 March 2014 at 11:30AM
    007stuart007stuart Forumite
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    edited 30 March 2014 at 11:30AM
    What this really comes down to, is did the banks know what was coming?

    Highly unlikely, the UK banks in the 2000's faced the prospect of a previously closed market that was effectively a cartel being attacked by a variety of new aggressive lenders. They came primarily from the USA where already the US banks had saturated the housing market. They needed new markets to continue to lend at the levels they had being doing so and thus maintain their profit level which in turn maintained investor confidence.

    One essential difference between the US and UK mortgage markets then was the idea of Securitisation, i.e. whilst the UK banks held their mortgages and the associated risks of default, the US banks sold the mortgages to investment banks and of course the associated risks. A benefit of this was that they had a very low default rate so by going down the Securitisation route the US banks still had their AAA rating and significantly more funds to lend whilst the UK banks were doing just as they always did, holding the debt and the risk.

    What could they do?

    The only thing was to start Securitising mortgages just like the US Banks. Remember the UK Banks all had a near perfect risk rating due to their past prudential lending and therefore the investment banks took all the Securitised mortgages they could get. This then gave the UK banks funds to compete with the US Banks and go head on with them in the Sub Prime market.

    Why did they have to compete?

    They could do 2 things, nothing or compete. But really there was only one option and that was to compete. All the available evidence showed the Sub Prime market was profitable otherwise why would the ratings agencies give these mortgage backed securities AAA ratings. The UK Banks had to protect themselves being swamped by the competition, lose market share, investor confidence leading to a lower share price and a greater risk of being taken over. So they had no option but move into the same markets as the US Banks and start securitisation themselves and reap the rewards of Sub Prime lending.

    What was the attraction of Sub Prime lending?

    Margin.

    Competition in the Prime market had driven margins to near non existent levels. Lenders started to equate risk with interest rate. The higher the Sub Prime risk the higher the chargeable rate and of course the higher margin and to a certain extent a normalisation in their profits albeit they were predominately now from Sub Prime.

    On the other side of the Atlantic the US investment banks found the entry of the UK Banks was very convenient because they could now amalgamate both the Securitised Debts of the UK and US banks, package it and sell it on (with the rating agencies' AAA rating as held by both US and UK banks) to other Banks who would treat them as low risk debt (remember the AAA rating ). This meant that they did not need to provision in their balance sheets for potential losses as they should have done.

    Had the Banks who purchased the properly provisioned for Mortgage Backed Securities it is entirely possible these banks would have then lost the coveted AAA rating, which in turn would have forced the rating agencies to down grade these Banks and the Securitised debt sold by them. Of course we now know that the AAA ratings were wrong and this along with the housing bubble in the 2000's later led to the global banking crisis of 2007-2008.

    It would then seem that the Rating Agencies got the ratings wrong but with the complexity of these packaged debts it was hard to really understand what they were rating. They had no reason to downgrade these debt packages as the contributing lenders had AAA ratings. Why should it be anything other than AAA? Doing so would have dire consequences for the whole banking industry, which as it turned was eventually what happened some years later with the previous AAA rated securities being reduced to "junk" status and for those banks holding these Mortgage Backed Securities, they faced a massive hole in their balance sheets. Just look at the write downs banks made as the banking crisis gathered pace.

    Rather than repeat what was done to halt this crisis please see Wikipedia http://en.wikipedia.org/wiki/2008_United_Kingdom_bank_rescue_package.

    What resulted from the actions taken by Government was the dramatic cut in interest rates which led to the position the OP describes.

    Were the banks to blame?

    Many have taken that view that they were, but the OP's question was "did the banks know prior to the banking crisis"?

    Certainly the Regulators, it would seem, didn't have a clue until all hell let loose and it took Government 48 hours to come up with a package to halt the slide in the banks' share price and thus bolster investor confidence.

    Why didn't the Regulators know? The Labour administration under Tony Blair had favoured the "light touch " approach to Regulation. The previously unprecedented boom in the world economy and in particular the UK economy had created the view that "light touch" regulation was the way to go and there was no reason to deviate from this course of action.

    My view is that if the Regulators had known prior to the crisis, steps would have been taken to damp down mortgage demand, impose tougher conditions on the banks operating in that sector, which later happened. The Financial Services Authority had a history of failing to be proactive and as history has shown not seeing where the threats to the UK Financial Institution would come from.

    Now turning to the banks, Certainly Northern Rock and HBOS and Lloyds TSB, it would seem given by the trouble they got into didn't know. RBoS had purchased ABM Amro which turned out to be straw that broke the camels back. Coupled with massive losses on its Investment bank side and the need to raise capital to fund the purchase of the Dutch Bank, it was forced to accept a bail out from the UK Government. Woolwich Barclays did not obtain Government funds but obtained £7bn worth of new investment, most of which came from the gulf states of Qatar and Abu Dhabi.

    So it seems that even your bank was caught with its trousers down.

    I do hope that this post has given you some comfort in knowing that you were just a victim of circumstance and had your old Nationwide fixed rate expired say 6m later you would sitting like many of those who through no action of their part ended up with a mortgage rate that had they been borrowers in the 80's and early 90's they would never had believed possible.

    BTW there was certainly collusion between lenders and Life Assurance companies selling Low Cost Endowment(LCE) Policies as the bulk of the commissions paid went to lenders as it is a matter of record the bulk of mortgages in the 80's and early 90's were arranged directly with lender thus the commission went to the lender and not to employed staff advising on mortgages. Thereafter the balance moved in favour of intermediaries who did get the commissions so I think you must be referring to those people, it not was possible to make substantial money in commissions when employed by a bank/building society to arrange mortgages.

    In the 80's it was the norm to surcharge a LCE backed mortgage by say 0.25% as compensation for receiving no repayment of the capital element of the mortgage until the end of the mortgage term. Also it was a requirement that a minimum of 80% of future bonuses were required to cover the capital borrowed. Why the surcharge was dropped I don't know but perhaps the lure of a large up front commission may have made lenders reconsider.

    Anyway once the surcharge disappeared the attraction of a LCE became greater. Free Life cover and the prospect of getting money back seemed to good to true. If you had decided a Capital & Interest Repayment mortgage the lender would insist up a Death cover policy of the mortgage amount as further security. So suddenly this extra cost disappears when you have a LCE Mortgage.

    Whilst interest rates were about 8% the overall cost was very close so most people went LCE for the reasons above and the Lenders got their commission and thus their profits went up. In the late 80's/early 90's interest rates climbed quickly mainly because of Britain's exit from the ill fated Exchange Rate Mechanism and as interest rates rise the proportion capital to interest decreases and whilst the LCE premium remains the same the effect was to make LCE mortgages much more expensive than Cap&Int. Sales of LCE mortgages fell and therefore the value of commissions to the lenders.

    So this valuable source of income was drying up, what could be done to reverse this trend?

    Simple, make LCE mortgages as cheap as Cap&Int mortgages. So it was decided that no longer would lenders insist on 80% of bonuses being required to fund the mortgage but now 100% of future bonus would be enough. This change in requirements reduced the LCE element cost to make the overall cost of a LCE mortgage roughly the same as a Cap&Int mortgage. Sales returned and all was well. However this action caused removal of the safety net and should investment returns fall for any reason there was no way the LCE would ever cover the capital borrowed. Interest rates fell in the later part of the 90's therefore investment returns also fell and suddenly people started getting the warning letters about a potential shortfall. Obviously losses were further compounded following subsequent rate falls and so the great misselling of endowments scandal started.

    Sorry about the length of the post but there was so much going on behind the scenes a couple of lines in reply is not enough.
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