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

DullGreyGuy

k12479 said:

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.

You say that but the backbook of annuities I sold the buyer immediately offered those with tiny annuities the option to cancel their policy for cash... again in principle they were in it for the long game but chose to exit some and benefit from the unused operational component that we'd paid them.

Not saying that the buyer would accept the offer either and as you say, those buying these types of long term assets/liabilities are in it for the long game but occasionally they can decide to turn a quick profit. 

saajan_12

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?

By that logic of only paying what the debt cost a lender, then
- looking at Engage standalone, they only paid say 40% so you should only pay 40% of the payments
- looking at Future standalone, they paid 100% when initially loaning to you and recovered 40% of this from Engage. So net they paid 60% for the debt - why should they write that down, instead of you still having to pay what they paid for the debt? 

That means you pay 100% across the two. Between them, they've agreed that Future's 60% will also go to Engage for their own reasons which aren't really anything to do with you. So bottom line, you still owe the 100%. 

saajan_12

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.

No, because the book is sold at 50% as a *package*. That doesn't mean that every individual mortgage is 50%, just that's a price accounting for
- removing admin hassle of negotiating with each individual borrower
- getting money upfront instead of managing the risk to rates / property etc over the term
- some mortgages may recover more, some less. The borrowers who take up that offer will be skewed to the ones who can afford to repay more, so the remaining package will be worse and the lender will get even less than 50% for the rest. 

verystrange

saajan_12 said:

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?

By that logic of only paying what the debt cost a lender, then
- looking at Engage standalone, they only paid say 40% so you should only pay 40% of the payments
- looking at Future standalone, they paid 100% when initially loaning to you and recovered 40% of this from Engage. So net they paid 60% for the debt - why should they write that down, instead of you still having to pay what they paid for the debt? 

That means you pay 100% across the two. Between them, they've agreed that Future's 60% will also go to Engage for their own reasons which aren't really anything to do with you. So bottom line, you still owe the 100%. 

No idea, but, nevertheless, they did write it down. That's a fact.

So far as their agreement being nothing to do with me, really, nothing could be further from the truth. My mortgage has everything to do with me.

DullGreyGuy

verystrange said:

saajan_12 said:

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?

By that logic of only paying what the debt cost a lender, then
- looking at Engage standalone, they only paid say 40% so you should only pay 40% of the payments
- looking at Future standalone, they paid 100% when initially loaning to you and recovered 40% of this from Engage. So net they paid 60% for the debt - why should they write that down, instead of you still having to pay what they paid for the debt? 

That means you pay 100% across the two. Between them, they've agreed that Future's 60% will also go to Engage for their own reasons which aren't really anything to do with you. So bottom line, you still owe the 100%. 

No idea, but, nevertheless, they did write it down. That's a fact.

So far as their agreement being nothing to do with me, really, nothing could be further from the truth. My mortgage has everything to do with me.

But the book of business would have been written down before the sale anyway... no one who thinks they'll get all the monies in then sells it for 50%... they either have to value it on a fair basis or hold a liability against it for default - in US GAAP its the former but not sure under IFRS or UK GAAP.

dunstonh

 no one who thinks they'll get all the monies in then sells it for 50%.

Actually, with mortgage books, a number of low-capitalised lenders wanted out and were willing to take a price that probably didnt reflect the failure rate as getting out in one piece was more important than the value they got for it.

k12479

DullGreyGuy said:

k12479 said:

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.

You say that but the backbook of annuities I sold the buyer immediately offered those with tiny annuities the option to cancel their policy for cash... again in principle they were in it for the long game but chose to exit some and benefit from the unused operational component that we'd paid them.

Not saying that the buyer would accept the offer either and as you say, those buying these types of long term assets/liabilities are in it for the long game but occasionally they can decide to turn a quick profit. 

Thanks for your insights.

Aren't the cases slightly different though? Buying a mortgage that's ticking along happily is taking on an asset, whilst buying an annuity is, presumably, taking on an asset+liability so proactively managing the liability side will maximise the asset side. That seems akin to taking on defaulted mortgages where the costs/liabilities of recovery will need to be watched and accepting less than the outstanding debt would make sense.