How Safe Is Fixed?

[dog]

If interest rates were to rise by 2% over the next 18 months, this would create a double whammy. Borrowers would be faced with a 50% rise in repayments and house prices would go into free fall. Such an outcome may arise for example if there is a run on the pound.

My question is this:

In such circumstances, would new lenders be obliged to honour terms agreed with the original lender. For example could a new lender convert a fixed rate loan of 5% into a variable rate of say 8%?

[zorn]

If interest rates were to rise by 2% over the next 18 months, this would create a double whammy. Borrowers would be faced with a 50% rise in repayments and house prices would go into free fall. Such an outcome may arise for example if there is a run on the pound.

My question is this:

In such circumstances, would new lenders be obliged to honour terms agreed with the original lender. For example could a new lender convert a fixed rate loan of 5% into a variable rate of say 8%?

<{POST_SNAPBACK}>

Either your original contract still exists, in which case your terms & conditions are unchanged, or it doesn't, in which case you don't have to repay anything.

[dog]

Either your original contract still exists, in which case your terms & conditions are unchanged, or it doesn't, in which case you don't have to repay anything.

<{POST_SNAPBACK}>

What you say makes sense but do people know what their contracts really contain? Some years ago, a big lender sold off their mortgage portfolio (it might have been Citibank). Borrowers then discovered that the new lenders were able to use the small print to impose much higher interest rates and draconian penalties. I do not have a mortgage so I don't know what the contracts say. I would not be surprised however to find a nasty little get out clause somewhere. As far as getting off the loan scot free, that does not seem to happen in practice (see JM bank and Barings).

Edited September 8, 2005 by dog

[aclwalker]

What you say makes sense but do people know what their contracts really contain? Some years ago, a big lender sold off their mortgage portfolio (it might have been Citibank). Borrowers then discovered that the new lenders were able to use the small print to impose much higher interest rates and draconian penalties. I do not have a mortgage so I don't know what the contracts say. I would not be surprised however to find a nasty little get out clause somewhere. As far as getting off the loan scot free, that does not seem to happen in practice (see JM bank and Barings).

<{POST_SNAPBACK}>

Yes, small print is a b*gger.

I always try to read the entire agreement right through in front of whoever is wanting me to sign it, mostly to make a point to them that their small print is totally unreasonable, while they anxiously clock-watch.

If everyone did this, we'd maybe find it getting sorted out.

But things that rely on everyone doing it never actually happen...

[adren]

Disclaimer I am not a laywer or accountant but I hvae some experience...

When a firm gets into serious trouble (ie cannot pay the bills)

it must declare itself insolvent and go into administration.

What happens in adminisatrion is:

1. The company stops trading and everyone is laid off so running costs are minimised.

2. A firm of lawyers and accountants are brought in "The Administrator"

3. They look for ways to protect shareholders from financial damage.

What they do is:

1. Figure out what the company's assets and liabilities are

2. Cast around to find purchasers or new funding or loans or investors.

3. Then they either: a) fold the company sell [bits of] it c) a combination of these

The idea is to get a handle on how much CASH is left in the firm and then to

give the people it owes money to an idea of what's left. The queue of the owing

has a logical order. It is (roughly speaking):

1. tax man

2. the administrator

3. preferred creditors (class A shares etc)

4. other creditors

5. employees

6. suppliers

New suitors or investors will not buy something that has a lot of liabilities so sometimes

sweeteners are added just to the exisiting shareholders get _something_. This usually

entails selling the assets at below face value to compensate for the liabilities. At which

point NewCo enters the frame, looking for an acquisition.

Finally the oldCo's assets are transferred to a new vehicle "newCo". Since newCo is the

successor in interest to oldCo, they have taken on its assets and liabilities. Now if one of

these assets is your mortgage then its as-you-were, except your direct debit changes from

oldCo to NewCo. It is the shareholders of OldCo who most likely would be taking a bath.

Another poster mentions your small print probably contains a nasty zombie clause and

it probably does. However, in principle it would not make sense for NewCO to shaft

too many of its new customers (as they are the future). Rather they would shaft OldCo

shareholders (as they are the past).

I could be wrong, but the principles are relatively accurate from what I understand of business.

[dog]

Another poster mentions your small print probably contains a nasty zombie clause and it probably does. However, in principle it would not make sense for NewCO to shaft too many of its new customers (as they are the future). Rather they would shaft OldCo shareholders (as they are the past).

In the example I cited, the Newco in question bought up the mortgage portfolio and milked it for all it was worth. They had no concerns about bad press as they were not in the market for new borrowers. If the market turns sour, it will not be other building societies that buy up mortgage portfolios from distressed lenders, it will be vulture funds. Such organisations will show no mercy if three are get out clauses.

[Ah-so]

Disclaimer I am not a laywer or accountant but I hvae some experience...

When a firm gets into serious trouble (ie cannot pay the bills)

it must declare itself insolvent and go into administration.

What happens in adminisatrion is:

1. The company stops trading and everyone is laid off so running costs are minimised.

2. A firm of lawyers and accountants are brought in "The Administrator"

3. They look for ways to protect shareholders from financial damage.

What they do is:

1. Figure out what the company's assets and liabilities are

2. Cast around to find purchasers or new funding or loans or investors.

3. Then they either: a) fold the company sell [bits of] it  c) a combination of these

The idea is to get a handle on how much CASH is left in the firm and then to

give the people it owes money to an idea of what's left. The queue of the owing

has a logical order. It is (roughly speaking):

1. tax man

2. the administrator

3. preferred creditors (class A shares etc)

4. other creditors

5. employees

6. suppliers

I could be wrong, but the principles are relatively accurate from what I understand of business.

<{POST_SNAPBACK}>

Pretty accurate.

The administrator is there for the benefit of creditors rather than shareholders. If all creditors get paid, it is an added bonus if shareholders get something back.

Also, it is no longer necessary to lay of everyone. Particularly if the core of the business is sound - it can be sold on as a going concern.

I think that the tax man's creditor status has been reduced to that of general creditor now and the administrator gets first look in (he wouldn't do the work if he didn't get paid).

[Jason]

The idea is to get a handle on how much CASH is left in the firm and then to

give the people it owes money to an idea of what's left. The queue of the owing

has a logical order. It is (roughly speaking):

1. tax man

2. the administrator

3. preferred creditors (class A shares etc)

4. other creditors

5. employees

6. suppliers

<{POST_SNAPBACK}>

This order has been changed.

The taxman is no longer at the top!

1. the administrator

2. preferred creditors (class A shares etc)

3. other creditors/Taxman

4. employees

5. suppliers