Discussion in 'General Investing Discussion' started by Simon Hampel, 22nd Aug, 2007.
Inside Business - 19/08/2007: Credit rating agencies under scrutiny
Inside Business - 19-Aug-2007
Many people are unaware of a widely used practice by lenders in Australia.
As part of the banking regulation, banks cannot state the full value of your loan on their balance sheet because there is a contigency. Additionally they are required to keep a liquid buffer as a percentage of assets.
Solution: Assign the rights to repayments of the loan to a third party for a sum. The bank has moved the loan off balance sheet and does not have to tell you as it is not a legal assignment, they merely collect on behalf of someone else.
In the small print you signed was an agreement that the bank could foreclose for any reason, even if the borrower is not at fault. Now your loan is packaged up and securitised on the market as a 'residential mortgage backed security' by persons unknown.
Problem is there seems to be not much control of these middle-men who could package up sub-prime loans into effectively junk bonds, but claimed to be 'mortgage backed' to mislead punters.
Depending on the financial competence of the third party securitisers, and the market sentiment of the bond holders then you as the original borrower could end up have your property sold by an unknown third party through no fault of yours.
The big name banks are playing this game just as much as the small operators and your debt plays pass-the-parcel.
This looks to be misleading both the borrower, and the ultimate bond-holder as they are unaware that their rights over the security may not be legal. It is unclear whether it breaches the Trade Practices Act but they do not have legal title, only equity.
Ask your bank who owns the rights to your mortgage and they will be unwilling or unable to tell you !!!
As a bond-holder ask your security company if it is the person named as having a legal encumbrance on the mortgaged property - again it is unwilling or unable to tell you.
I think both sides have been misled by the middlemen, this includes the banks.
As an addendum ...
So the banks get the best of both worlds, they can aggressively grow market share by lowering credit standards and they don't care if the borrower fails because they have sold the debt to someone else in the credit chain.
Thirteen years ago I approached Bank of Melbourne for a residential mortgage as an employed professional. The bank stated formally that they will lend three times my annual salary but unofficially urged caution as rates were beginning to rise and suggested 2.5 times.
What is the standards for similar arrangements today ?
Bear in mind that mortgage insurers are playing a part in the game as well.
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