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Tempest

How Some Lenders Can Lend To The Muppets They Do

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In case you wondered how idiots on £15k a year or with bad credit records or worse can get stratospheric mortgages (and to a degree how joe bloggs can get 5x salary+):

http://www.odpm.gov.uk/index.asp?id=1155554

It has been some time since this topice reared its head. It is worth a refresher. Many commercial lenders (banks/building societies) to the UK housing market raise funds by refinancing ther consumer mortgages by way of securitisations (real or synthetic) whereby the risk of default on a portfolio of mortgages is transferred (actually or notionally) to a special purpose vehicle which issues bonds/notes to investors in the capital markets. The investors buy the notes/bonds because the yield is attractive to them. The portfolio effect insulates them against the odd default/early prepayment. They are usually credit enhanced and credit rated by the agencies.

The point is that once a lender has a big bunch of loans signed it can package them off (eg in £x00m lots) , cream off the up front fees and a bit of "skim" from the interest margin which they charge you and effectively transfer all of their economic exposure to the loans to a group of investors...

This frees up their balance sheet to start lending again etc etc etc.

Thus the focus on bad debt/bad loan provision is less than in previous cycles.

Admittedly there are currently no more than 10% of mortgages the subject of these techniques - but they are the more recent ones! and they are increasing in proportion all the time. If defaults increase or if investor appetite declines or if the housing market or economy tanks the cost of this sort of financing will increase and lenders may be forced to keep more loans on their own books/balance sheets - THEN you will see a tightening of credit when it is more of the banks'/building societies' own money at stake.

The above is a very simplistic summary to get a message across - those of you who work in the city know what I am hinting at (and will know there is far more to it that this). The bottom line is that in an increasing number of cases "the building society/bank" is not at risk (or will not be at risk) in relation to a loan. This in part explains the apparent abandon with which some lenders have embraced the market and "affordability" constraints.

One guess which area of the lender market uses securitisations of mortgage backed securities heavily? Yes, the "sub-prime" lending market and those on the riskier multiples/lower credit ratings (ie those who ordinarily would never have obtained a loan from the bank manager of old or only at traditional multiples).

Another area which will turn quickly with the market and make liquidity tighten (particularly at the bottom end).

Edited by Tempest

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In case you wondered how idiots on £15k a year or with bad credit records or worse can get stratospheric mortgages (and to a degree how joe bloggs can get 5x salary+):

http://www.odpm.gov.uk/index.asp?id=1155554

It has been some time since this topice reared its head. It is worth a refresher. Many commercial lenders (banks/building societies) to the UK housing market raise funds by refinancing ther consumer mortgages by way of securitisations (real or synthetic) whereby the risk of default on a portfolio of mortgages is transferred (actually or notionally) to a special purpose vehicle which issues bonds/notes to investors in the capital markets. The investors buy the notes/bonds because the yield is attractive to them. The portfolio effect insulates them against the odd default/early prepayment. They are usually credit enhanced and credit rated by the agencies.

The point is that once a lender has a big bunch of loans signed it can package them off (eg in £x00m lots) , cream off the up front fees and a bit of "skim" from the interest margin which they charge you and effectively transfer all of their economic exposure to the loans to a group of investors...

This frees up their balance sheet to start lending again etc etc etc.

Thus the focus on bad debt/bad loan provision is less than in previous cycles.

Admittedly there are currently no more than 10% of mortgages the subject of these techniques - but they are the more recent ones! and they are increasing in proportion all the time. If defaults increase or if investor appetite declines or if the housing market or economy tanks the cost of this sort of financing will increase and lenders may be forced to keep more loans on their own books/balance sheets - THEN you will see a tightening of credit when it is more of the banks'/building societies' own money at stake.

The above is a very simplistic summary to get a message across - those of you who work in the city know what I am hinting at (and will know there is far more to it that this). The bottom line is that in an increasing number of cases "the building society/bank" is not at risk (or will not be at risk) in relation to a loan. This in part explains the apparent abandon with which some lenders have embraced the market and "affordability" constraints.

One guess which area of the lender market uses securitisations of mortgage backed securities heavily? Yes, the "sub-prime" lending market and those on the riskier multiples/lower credit ratings (ie those who ordinarily would never have obtained a loan from the bank manager of old or only at traditional multiples).

Another area which will turn quickly with the market and make liquidity tighten (particularly at the bottom end).

We have discussed this before - my big question is who is left holding the baby? Wouldn't it be poetic justice if it was the baby boomers' pension funds, and they all went pop with the housing market when they attempt retirement? :lol:

I am amazed that bond holders are prepared to take the risk on this junk for little or no premium......surely they must do some research (or perhaps they get a daily market report from Economic Sensation...).

P.s. please give any more detail that you are hinting at....I used to work in the city and would be interested to know all the dirt (as would many others I'm sure). Do the words "credit derivatives" feature in it?

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Just one form of toxic waste, chucked overboard when the lending quality ship is sinking.

http://www.answers.com/topic/toxic-waste

Toxic Waste

A slang term referring to securities that are unattractive due to certain underlying provisions or risks making them generally illiquid with poor pricing schemes and transparency.

Investopedia Says: Mainly used in reference to CMOs, toxic waste represents the small portion of these products that are byproducts created as a result of providing the majority of CMOs with minimal risk. In effect, this small portion of byproducts is used as outlets for transferring a substantial portion of the underlying risks involved in making the obligations and then marketed to investors.

See Also: CMO, Mortgage Backed Securities, Pass-Through Security, Structured Finance, Tranches

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how idiots on £15k a year or with bad credit records or worse can get stratospheric mortgages (and to a degree how joe bloggs can get 5x salary+):

easy again.

they simply believe their dads and continue to vote new labour.

then chanting the mantras. prices only ever go up. rents dead money and oreeeett chah got me a lexus.

never again will i atempt to undermine a tortoise with burning matches.

for this is the end. the end of the bad bit. only warm waterfalls of joy await us.

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Bumb, bump.

Tempest nailed it nearly two years ago. What we are seeing is exactly what he originally posted.

Obviously this was much to difficult a concept for the BOE/FSA/Politicians to understand.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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