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The unauthorised version

How do you make a very fast buck today in an unregulated market? Secondhand car sales/double glazing/estate agency/timeshare/politics? All been done, books written.

Of course, I cannot be talking about the UK housing market? Newbuild city centre buy-to-let ghost towns? No, of course not. With property prices now falling by around 2 per cent a month, all property is bad news, full stop.

Ok, let’s look at some numbers. Imagine you can buy an asset at 50p in the £1. That asset is in the form of debt secured against property. In this example, 12 months ago, the property was worth £200,000 bought with an 80 per cent loan to value mortgage of £160,000.

Today, the borrowers are five months in arrears and their mortgage has just been bought at 50p in the £1. The buyer is unregulated, that is, has no mortgage authorisations, and is therefore in no position to be able to agree to any loan modifications with the borrower.

More to the point, they do not want to because the buyer wants the borrower out as soon as possible and has no interest in making an arrangement to help keep the borrower in the property.

When you consider the numbers, you can see why. The buyer can take vacant possession within about three months and sells at auction for £140,000 – 30 per cent less than what the property was worth (market value fall plus additional hit because it is now a repo property). In fact, call it 40 per cent down if you want.

Now, let us suppose that the buyer is left with about £120,000 after all costs, etc – this transaction has just yielded a 50 per cent return in less than a year because the original “investment” was bought at 50p in the £1, that is, £80,000 being 50 per cent of the £160,000 loan. Not bad, eh? (By the way, the 50p in the £1 figure was the going price in the market in August before the September meltdown).

How can this happen in 2008 Britain? There is a combination of elements at play, including a (large) legal loophole (requiring primary legislation), institutions desperate to sell mortgage asseTS to help rebuild their balance sheets (typically investment banks), institutions who equally need to rebuild their balance sheets using this “investment” as a fast-buck opportunity (typically US hedge funds) and today’s market conditions (being able to discount reputational risk).

The legal loophole

The UK has a regulated mortgage market where, to participate, an institution needs FSA authorisation for mortgage permissions. Regardless of whether that institution is Halifax (wanting to offer a borrower a further advance), HML (a borrower wants to extend the term of his repayment mortgage) or Savills (a purchaser wants advice on the best deal), all activities fall under the FSA’s authorisation umbrella and its TCF requirements.

However, if you have got the cash and can find a seller of mortgage assets (performing or non-performing loans), then you do not need to be authorised to buy it. Of course, as an unauthorised purchaser (and, frankly, why would you want to spend upwards of six months getting authorisation when the market opportunity is now and your strategy is to take a quick turn from the sale of the property?), you are not able to enter into a relationship with your borrower because you are not authorised to make any loan modifications.

A borrower has found work and can now start making a reduced mortgage payment. Most lenders will look to capitalise any arrears and move the borrower on to a new payment schedule. However, if the borrower is unlucky to have his loan traded (and is far more likely to have if the account is in arrears) and bought by an unauthorised investor, he will not be given that choice. Neither the “owner” of his debt is interested or indeed legally able to make any changes to his loan account. This is in breach of TCF but falls outside FSA action because the asset owner is not technically breaching any rules under Mcob – more like ignoring them.

Mcob never looked to “allow” this loophole of course. Today, the FSA states that lenders who sell on mortgages should be satisfied that TCF is being respected but not all sellers of mortgage debt are concerned about their brand reputation.

Unhappy owners of mortgage assets today, that is, mostly the investment banks, are no longer concerned about reputational risk because they are not in the market generating new business (and are unlikely to be for a long time to come).

One recent estimate of the size of this unwanted mortgage asset put the figure at £30bn and this excluded Northern Rock with its £100bn (and now add other unwanted asset in nationalised lenders to that total).

The numbers begin to look fairly frightening and the recession has only just started. This is one of the reasons why the ratio of repossessions to arrears has increased significantly from the last recession.

On the plus side, there are opportunities for intermediaries and their mortgage clients.

Next week: It can pay handsomely to be with a “wrong” lender if you have cash, and what next for the policymakers?If you have any information to share or points to make, please email


Running on empty

In producing its retail distribution review proposals, the FSA has penned the longest suicide note in history. After all, a regulator is no longer a requirement when there is nobody left to regulate.

Knight rdr

Leaving last week’s FSA conference on the retail distribution review, it was very obvious to me who was the clear winner of the contest – Stephen Hadrill of the Association of British Insurers.


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