Loophole For Lenders Of Fixed Mortgages

[BillyShears]

A fair number of people on this board have said that people can guarantee their future mortgage payments by taking out a fixed rate mortgage. So, if interest rates go up significantly, they won't be affected. But is it really a 100% safe bet?

Standard mortgages include a clause that should the borrower go into negative equity, i.e. should the value of the house fall so that it no longer covers the mortgage, that the bank can require the borrower to pay back a lump sum so that the value of the house now covers the mortgage.

Consider the case where someone buys a house now, with a small deposit and a large fixed rate (for the life of the mortgage) mortgage. Something happens (bird flu, meltdown, etc.) and inflation rockets. Interest rates go up accordingly, reaching, say, the teens. The person who bought their house on a low mortgage rate is sitting pretty, insulated from the fallout. Or are they? If interest rates go up to several times their current levels, then it's a given that house prices will fall, plunging the fixed rate mortgage holder into negative equity. That then gives the bank the option of demanding a block repayment of the mortgage amount. The home owner is then given the option of obtaining a loan at current mortgage rates, very difficult the the borrower has no equity in their house. So if they can't then come up with the money, then the bank has the option of repossessing the house.

I'm not going to predict how likely this is to happen, but the loophole is there.

Billy Shears

[Righteous]

Thanks for your post, it is a very interesting thought and I am sure most people don’t bother to read the small print. Its very sneaky of the banks though isn’t it ?

Well never mind BillyShears it just means more cheap houses for us to choose from when we are at the bottom of the crash !

Good luck I hope you get a bargain.

[dog]

Good point!

The other possibility is that the lenders might simply renage on the deal if they get into difficulties. We have seen all kinds of chicanery going on in the insurance and life insurance industries where companies have got into difficulties. There have also been cases where mortgages have been sold on to new companies who have refused to honour the original terms.

[property flipper]

[The bank will not revalue the house unless the borrower is in default, the bank borrows the money on the market for the term of the fixed rate period at the onset of the mortgage at a fixed rate, they may not lend you any more money but they are not going to call in a portion of a loan.

[BillyShears]

[The bank will not revalue the house unless the borrower is in default, the bank borrows the money on the market for the term of the fixed rate period at the onset of the mortgage at a fixed rate, they may not lend you any more money but they are not going to call in a portion of a loan.

How do you know this? Is it written into the contract? Is it common practice that the bank could change at will if the mortgage turned into a money-losing proposition?

When we discussed these clauses before, someone mentioned that their parents had part of their loan called back in. We started discussing this after a press article claiming that this would be common in the case of a house price crash.

Billy Shears

Good point!

The other possibility is that the lenders might simply renage on the deal if they get into difficulties. We have seen all kinds of chicanery going on in the insurance and life insurance industries where companies have got into difficulties. There have also been cases where mortgages have been sold on to new companies who have refused to honour the original terms.

I wonder if the fixed rate mortgages include any specific get-out clauses. Like it being possible for the lender to change the conditions of the loan in specific, or "extraordinary" circumstances. In any case, the loophole is there.

Billy Shears

[patprimer74]

Standard mortgages include a clause that should the borrower go into negative equity, i.e. should the value of the house fall so that it no longer covers the mortgage, that the bank can require the borrower to pay back a lump sum so that the value of the house now covers the mortgage.

1. Are you sure that this is the case?

2. Even if it were the case, why would a lender wish to foreclose on a performing loan (assuming the borrower could/would not reduce the borrowing) if they weren't fully covered by security? There would be nothing in it for the lender. After all, quite a few lenders are prepared to lend over 100% in any case.

p

[JustYield]

How do you know this? Is it written into the contract? Is it common practice that the bank could change at will if the mortgage turned into a money-losing proposition?

Billy Shears

Discussed this last year too:

http://www.housepricecrash.co.uk/forum/ind...ndpost&p=134872

Security Margin

If at any time the market value is less than the amount we consider provides us with an acceptable security margin, or in our opinion the secured property materially decreases from its value ... or the secured property becomes less saleable ... we may:

...

c) require you to repay part or all of the total amount owing for all facilities on demand

In the Glossary, market value means:

...the most recent valuation by a valuer we [the bank] select OR

if there is no valuation report, the market value of the property as determined by us

When asked, the banker said that in practice if you did not default on the monthly payments they are not going to invoke this clause. But they can.

JY

Edited May 22, 2006 by JustYield

[WSG]

More likely will be the phenomona of people finishing their fixed rates and then going onto banks SVR as they will be unable to mortgage tart because of thier Negative equity. The banks will be quick to rack up the SVR as they'll have them hooked

[BillyShears]

1. Are you sure that this is the case?

JY posted the answer to this.

2. Even if it were the case, why would a lender wish to foreclose on a performing loan (assuming the borrower could/would not reduce the borrowing) if they weren't fully covered by security? There would be nothing in it for the lender. After all, quite a few lenders are prepared to lend over 100% in any case.

The loan might be loss-making for the bank, or for organisations that the bank wants to maintain a relationship with. I've read books on CRM (Customer Relationship Management) and there were big sections on how to identify the customers who are losing you money, and how to get rid of them.

But in any case, I'm not arguing whether or not this is likely to happen, but whether the loophole is there.

Billy Shears

[patprimer74]

Discussed this last year too:

http://www.housepricecrash.co.uk/forum/ind...ndpost&p=132793

Is this a quote from an actual mortgage document? i.e. the mortgage deed itself?

Has anyone else got documentary evidence?

p

[BillyShears]

Is this a quote from an actual mortgage document? i.e. the mortgage deed itself?

Has anyone else got documentary evidence?

p

If you go look at the original referenced thread, you'll see that it's a quote from the terms of an actual mortgage.

Billy Shears

[Katherine]

If you go look at the original referenced thread, you'll see that it's a quote from the terms of an actual mortgage.

Billy Shears

There is no such clause in my mortgage agreement.

[patprimer74]

If you go look at the original referenced thread, you'll see that it's a quote from the terms of an actual mortgage.

Billy Shears

Sorry to be pedantic, but it does not say so. That's why I ask, again, has anyone seen this clause in legal documentation? That is, in the charge form, itself? (I gather from your comments that this is a field in which you, Billy Boy, are fairly unfamiliar.)

p

[laurejon]

I have fixed for 15yrs, I am probably the last person left in the UK who actually asks for the Terms and Conditions they often reference in the agreements but dont print in the legal document.

For that sufference I now have poor eyesight, although my ex would disagree with this and atribute this to other activities :-)

I have never seen any such clauses, other than to say the obvious.

"Your home is at risk if you do not keep up repayments".

There is a clause that states that if my circumstances change without notifying them then they reserve the right to withdraw the fixed rate, however they would have to argue that one in court.

[BillyShears]

Sorry to be pedantic, but it does not say so. That's why I ask, again, has anyone seen this clause in legal documentation? That is, in the charge form, itself? (I gather from your comments that this is a field in which you, Billy Boy, are fairly unfamiliar.)

p

Well, it would be more conclusive to see it in current mortgage documents. As one person has posted, it isn't in her mortgage t&c, and it wasn't obviously in a few forms I found online, but I'll have a look further. It could be an exceptional clause not in some contracts. Or, it could be present in expanded terms and conditions available from the lender (one form referenced other documentation available from the lender). A third alternative is that it's only found in foreign mortgages. I found a paper discussing the use of clauses like this in Singapore and Japan, saying that exercising such a clause was rare in Singapore, but more common in Japan. The original article I found way back when (don't have the original link - searching through booth google and the HPC search facility wouldn't find it) was published in the USA.

Billy Shears

[laurejon]

Is is quite possible that some of the sharks in the business will secrete something like this within their legal agreements.

I think you get what you pay for, if its too good to be true, then it probably is not true.

I paid a fair price for my fix given the 15yrs, and the agreement is of merchantable quality, looked over by my solicitor on my behalf also. For sure it costs, but when fixing for that lenght of time you have to be commited and live by your decision.

[kevino]

How do you know this? Is it written into the contract? Is it common practice that the bank could change at will if the mortgage turned into a money-losing proposition?

When we discussed these clauses before, someone mentioned that their parents had part of their loan called back in. We started discussing this after a press article claiming that this would be common in the case of a house price crash.

Billy Shears

I wonder if the fixed rate mortgages include any specific get-out clauses. Like it being possible for the lender to change the conditions of the loan in specific, or "extraordinary" circumstances. In any case, the loophole is there.

Billy Shears

By virtue of the fact you are paying interest, the bank is making money on the loan. Why would they force a repossesion if you are happily paying the loan to them???

As is stated on here often, people really only have equity or profit in the home if the home is sold at more money than was paid (minus the payback of the loan). Likewise, Negative equity is only the case if you have to sell the home for less than the remaining mortgage amount.

For example, if I've been paying a mortgage for 24 years, one year left, the bank have made a shedload of interest, why would they force a repo on me??? As long as you pay their loan back they couldn't give a damn what the value of the house is, that is your problem!!!!

Don't join the lunatic fringe on here and think that all homeowners are knackered when the crash comes and all the Renter's, FTB's and STR's will have there choice of all the homes in the UK. There are plenty of Owner Occupiers including some like myself (shock horror) without a mortgage, who will do VERY WELL out of the impending crash............................

[laurejon]

Very True, the average mortgage in the UK is currently 40k

Very few people bought in the last five years when you take the whole stock into account.

[tomr]

By virtue of the fact you are paying interest, the bank is making money on the loan. Why would they force a repossesion if you are happily paying the loan to them???

As is stated on here often, people really only have equity or profit in the home if the home is sold at more money than was paid (minus the payback of the loan). Likewise, Negative equity is only the case if you have to sell the home for less than the remaining mortgage amount.

For example, if I've been paying a mortgage for 24 years, one year left, the bank have made a shedload of interest, why would they force a repo on me??? As long as you pay their loan back they couldn't give a damn what the value of the house is, that is your problem!!!!

Yep, and when you lose your job and default on your mortgage and the bank repo your house they will not get enough money for it to cover the money you owe. This is why mortgages are secured loans, there's a lot less risk for the bank. A lot more risk if they know that they couldn't cover the loan if your house was repo'd.

[laurejon]

But the banks are in it for the long term, each year they set aside money for losses on loans.

The longer term loans are the end game, after 10yrs the estimate you will have a sizeable equity stake in your home.

Again, the average mortgage is 40k, if the average house is 200k then thats 160k of equity as security on each and every loan.

New loans, that is within the last five years represent a very small percentage of the risk on a banks books.

Remember Banks never ever lose money, they are risk adverse, they weigh it all up.

They are regulated by the FSA, and sniff of a problem and the FSA are all over them like a rash, the Government have emergency funds to bail out a bank, Barings being a classic example.

[Guest Charlie The Tramp]

Again, the average mortgage is 40k, if the average house is 200k then thats 160k of equity as security on each and every loan.

I find figures quoted on what the average mortgage is as quite strange. In the past 10 years borrowing has doubled from £600 billion to £1.1+ trillion and the biggest increase being since 2002. Regarding the cost to banks for defaulters I believe the total was around £22 billion last year and they now lose £20 in every £100 they lend.

Could you see the old East End Moneylenders standing for that.

laurejon Today, 11:31 PM Post #20|

Barings being a classic example.

Surely it was ING who bailed them out.

[kevino]

Yep, and when you lose your job and default on your mortgage and the bank repo your house they will not get enough money for it to cover the money you owe. This is why mortgages are secured loans, there's a lot less risk for the bank. A lot more risk if they know that they couldn't cover the loan if your house was repo'd.

Billy Boy's first post states that the bank would ask for extra payment if the house value dropped, even if you are paying the mortgage. This is pure b0ll0cks.

Yes secured against the home, which is why the interest is higher for larger LTV ratios, the extra interest should be for the banks to offset the risk.

Of course the bank may not get the value of the loan if they reposess. That is the risk they take. As they often say, " The Value of your investments can go down as well as up" After all, their loaning you the money for a home is an "Investment" as they are making interest on the loan. They could just stick it on the stock market??!!!

Whether the risks the banks and lenders have been taking are rational ones is another issue though..........

[JustYield]

Sorry to be pedantic, but it does not say so. That's why I ask, again, has anyone seen this clause in legal documentation? That is, in the charge form, itself? (I gather from your comments that this is a field in which you, Billy Boy, are fairly unfamiliar.)

p

My fault, here is the correct link to the discussion last year "Negative MEW":

http://www.housepricecrash.co.uk/forum/ind...ndpost&p=134872

This is quoted from mortgage docs I saw in Singapore from the local branch of a British bank (begins with H).

Common sense and experience shows that the banks will not call in performing loans if there is some security left. However, if the equity goes negative by more than 10%, say, I would not be surprised if the banks demand a top up from the borrower. It is a secured loan after all.

JY

[Cinnamon]

My fault, here is the correct link to the discussion last year "Negative MEW":

http://www.housepricecrash.co.uk/forum/ind...ndpost&p=134872

This is quoted from mortgage docs I saw in Singapore from the local branch of a British bank (begins with H).

Common sense and experience shows that the banks will not call in performing loans if there is some security left. However, if the equity goes negative by more than 10%, say, I would not be surprised if the banks demand a top up from the borrower. It is a secured loan after all.

JY

What is the gain for a bank if there is a glut of properties (as there would be in that situation) and they end up holding the unsellable crashed property in one long void spell, as they have predictably slaughtered their customer with their request?

Reposession is only a good method if you can sell what you're taking back, otherwise is self-sabotage.

It is far better to keep juicing the muppet for some more money!

----------------------

*English... the language that puts laughter into sLAUGHTER.

[JustYield]

What is the gain for a bank if there is a glut of properties (as there would be in that situation) and they end up holding the unsellable crashed property in one long void spell, as they have predictably slaughtered their customer with their request?

Reposession is only a good method if you can sell what you're taking back, otherwise is self-sabotage.

It is far better to keep juicing the muppet for some more money!

----------------------

*English... the language that puts laughter into sLAUGHTER.

"Keep juicing the Muppet!"

Sure, a top up can be demanded way before there is any talk of repo. I'd like to know how the lenders' credit scoring models work in this situation - as you say no point in precipitating that which they seek to avoid, but lenders don't always act sensibly.

JY