sub-prime mortgage sold to another lender - why do payments not reduce?

verystrange

Hi, 2008 I got a self-cert mortgage from Future Mortgages (Citi Bank, I believe). Subsequently this has moved to Pepper/Engage. I assume Future bundled a load of mortgages and sold them at a discount to exit this market/cut losses.

I bet Engage paid a pittance and the actual debt must be amortised on Future's books. Why is my mortgage not now the amount that Engage paid for it, rather than the original amount?

dunstonh

verystrange said:

Hi, 2008 I got a self-cert mortgage from Future Mortgages (Citi Bank, I believe). Subsequently this has moved to Pepper/Engage. I assume Future bundled a load of mortgages and sold them at a discount to exit this market/cut losses.

I bet Engage paid a pittance and the actual debt must be amortised on Future's books. Why is my mortgage not now the amount that Engage paid for it, rather than the original amount?

What an owner wants to sell it for and what a buyer wants to pay for it is nothing to do with the terms of your mortgage.

Sub prime costs more because of the borrowers.  Not because of the lenders.    The borrowers are paying above market rates to cover the costs of those that fail.

verystrange

yes, I understand why these mortgages can be expensive.

My question really is - if a lender buys my mortgage for half price, why do I still owe the full amount? Hasn't the original mortgage lender written off half the value?

DullGreyGuy

Think your suggestion through... if they did what you suggest then how would they pay their staff? How would they cover the people that default on their loan? Where would the profit come from? They are also covering a host of risks... inflation could go (more) crazy meaning their operational costs explode, they have clearly raised the money to buy the business from somewhere and that cost of money may well increase. As with any deal, both banks will have a view of the profitability and level of risk in the business bought (you speculate its loss making) and the amount paid will leave the seller happy its a reasonable outcome -v- just letting the book run on and the buyer that they've got reasonable prospects of a profit. 

You agreed to the terms of your mortgage and they have to honour it. They may make a profit from the deal or they may make a loss from it but that doesn't change your contract. 

When I did the sale of a book of annuities we similarly had customers ask if they could have the £X we had paid the buyer to take on the liabilities and it cancel the policy instead of it being transferred. The deal only works because the buyer will make money on some policies, lose money on some but hope that in the round they make money. The smaller the book the more susceptible it is to certain risks and so the higher the premium would have been. 

DullGreyGuy

verystrange said:

My question really is - if a lender buys my mortgage for half price, why do I still owe the full amount? Hasn't the original mortgage lender written off half the value?

I know insurance book keeping much better than banking but presumably they would have already effectively written off half the mortgage before they sold it as they will be holding bad debt provisions and OpEx provisions for serving the account etc. If I have a book of low quality business I cannot say I think I will make a 100% collection of that monies. 

Accounting is a funny old thing... if you looked at accounting for long term insurance like annuities then according to my records you will be 20% dead next year. Clearly in reality you can only be dead or alive but what its really saying is of the 100,000 customers in your cohort I predict 20% will have died and rather than randomly picking which customers that is I apply it across all the customers. 

verystrange

thanks for helpful replies, much appreciated

rtho782

DullGreyGuy said:Think your suggestion through... if they did what you suggest then how would they pay their staff? How would they cover the people that default on their loan? Where would the profit come from? They are also covering a host of risks... inflation could go (more) crazy meaning their operational costs explode, they have clearly raised the money to buy the business from somewhere and that cost of money may well increase. As with any deal, both banks will have a view of the profitability and level of risk in the business bought (you speculate its loss making) and the amount paid will leave the seller happy its a reasonable outcome -v- just letting the book run on and the buyer that they've got reasonable prospects of a profit. 

You agreed to the terms of your mortgage and they have to honour it. They may make a profit from the deal or they may make a loss from it but that doesn't change your contract.

When I did the sale of a book of annuities we similarly had customers ask if they could have the £X we had paid the buyer to take on the liabilities and it cancel the policy instead of it being transferred. The deal only works because the buyer will make money on some policies, lose money on some but hope that in the round they make money. The smaller the book the more susceptible it is to certain risks and so the higher the premium would have been. 

How about this, if a lender is about to sell your mortgage for 50% of the book value, they should have to offer you the option of clearing it for that amount before selling it. Perhaps you then remortgage elsewhere to clear it.

dunstonh

How about this, if a lender is about to sell your mortgage for 50% of the book value, they should have to offer you the option of clearing it for that amount before selling it. Perhaps you then remortgage elsewhere to clear it.

Why should the borrower benefit from the sale of a book?  They have no ownership value of the business being sold.  The shareholders of the selling and buying companies are the ones putting their money into the business. 

DullGreyGuy

rtho782 said:

DullGreyGuy said:Think your suggestion through... if they did what you suggest then how would they pay their staff? How would they cover the people that default on their loan? Where would the profit come from? They are also covering a host of risks... inflation could go (more) crazy meaning their operational costs explode, they have clearly raised the money to buy the business from somewhere and that cost of money may well increase. As with any deal, both banks will have a view of the profitability and level of risk in the business bought (you speculate its loss making) and the amount paid will leave the seller happy its a reasonable outcome -v- just letting the book run on and the buyer that they've got reasonable prospects of a profit. 

You agreed to the terms of your mortgage and they have to honour it. They may make a profit from the deal or they may make a loss from it but that doesn't change your contract.

When I did the sale of a book of annuities we similarly had customers ask if they could have the £X we had paid the buyer to take on the liabilities and it cancel the policy instead of it being transferred. The deal only works because the buyer will make money on some policies, lose money on some but hope that in the round they make money. The smaller the book the more susceptible it is to certain risks and so the higher the premium would have been. 

How about this, if a lender is about to sell your mortgage for 50% of the book value, they should have to offer you the option of clearing it for that amount before selling it. Perhaps you then remortgage elsewhere to clear it.

In theory you could always make an offer but as stated the book is sold as a whole which will be a mix quality of customers and if the seller starts cherry picking the better customers out of the deal the buyer changes their offer downwards. You similarly could immediately offer the buyer 10% above what they paid materialising a profit for them instantly. With both ideas the challenge is 1) getting in contact with someone who could realistically consider the offer and 2) knowing what you are being valued at.

I've dont backbook deals with both General insurance (commercial property, employers liability etc) and annuities (aka pensions). In the former the book is valued as a whole so there is no individual policy value, arbitrarily the price paid will be divided by the number of policies etc but that's very crude. Annuities on the other hand are individually valued both in terms of liability and operational costs (that's just £X per expected year of life with an inflation curve)

Having not done a deal in Mortgages I've no idea if the price paid is accurately calculated per mortgage (as per annuities) or is based on the total book as an average. If the later then there is much slimmer chance of anyone accepting a settlement offer even if you did contact the right person. 

The book would have to be very toxic to be sold for 50% of its value... maybe these things are done in banking but in insurance you are talking about a couple of percentage points from the book value (which may be materially different from what consumers value things at)

k12479

DullGreyGuy said:

rtho782 said:

DullGreyGuy said:Think your suggestion through... if they did what you suggest then how would they pay their staff? How would they cover the people that default on their loan? Where would the profit come from? They are also covering a host of risks... inflation could go (more) crazy meaning their operational costs explode, they have clearly raised the money to buy the business from somewhere and that cost of money may well increase. As with any deal, both banks will have a view of the profitability and level of risk in the business bought (you speculate its loss making) and the amount paid will leave the seller happy its a reasonable outcome -v- just letting the book run on and the buyer that they've got reasonable prospects of a profit. 

You agreed to the terms of your mortgage and they have to honour it. They may make a profit from the deal or they may make a loss from it but that doesn't change your contract.

When I did the sale of a book of annuities we similarly had customers ask if they could have the £X we had paid the buyer to take on the liabilities and it cancel the policy instead of it being transferred. The deal only works because the buyer will make money on some policies, lose money on some but hope that in the round they make money. The smaller the book the more susceptible it is to certain risks and so the higher the premium would have been. 

How about this, if a lender is about to sell your mortgage for 50% of the book value, they should have to offer you the option of clearing it for that amount before selling it. Perhaps you then remortgage elsewhere to clear it.

You similarly could immediately offer the buyer 10% above what they paid materialising a profit for them instantly. With both ideas the challenge is 1) getting in contact with someone who could realistically consider the offer and 2) knowing what you are being valued at.

But a buyer of a mortgage book (that is performing) will be doing so on the basis that it has years, perhaps decades, to run and they'll make their money back and their profit over that period. There'll be little to no incentive to make a small, quick profit when they can just wait to receive 100% of the outstanding debt over the term of the mortgage or through early redemptions.

ACG

rtho782 said:

DullGreyGuy said:Think your suggestion through... if they did what you suggest then how would they pay their staff? How would they cover the people that default on their loan? Where would the profit come from? They are also covering a host of risks... inflation could go (more) crazy meaning their operational costs explode, they have clearly raised the money to buy the business from somewhere and that cost of money may well increase. As with any deal, both banks will have a view of the profitability and level of risk in the business bought (you speculate its loss making) and the amount paid will leave the seller happy its a reasonable outcome -v- just letting the book run on and the buyer that they've got reasonable prospects of a profit. 

You agreed to the terms of your mortgage and they have to honour it. They may make a profit from the deal or they may make a loss from it but that doesn't change your contract.

When I did the sale of a book of annuities we similarly had customers ask if they could have the £X we had paid the buyer to take on the liabilities and it cancel the policy instead of it being transferred. The deal only works because the buyer will make money on some policies, lose money on some but hope that in the round they make money. The smaller the book the more susceptible it is to certain risks and so the higher the premium would have been. 

How about this, if a lender is about to sell your mortgage for 50% of the book value, they should have to offer you the option of clearing it for that amount before selling it. Perhaps you then remortgage elsewhere to clear it.

So the company buying a group of mortgages ends up with the riskier ones? 
I would rather buy a book of mortgages of people who can afford to pay it off/get a mortgage elsewhere than those who cant.