Mortgage Securitisation What is it all about?
Most of you who are reading this will, most likely, have a residential mortgage, including all you ‘buy to let’ landlords, but I doubt any of you have ever heard of mortgage securitisation, let alone know how it may have affected you and your loans.
Most lenders in the UK offer loans to enable you to buy property, all backed by a mortgage granted by you (not the lender, the deal is the other way round!) and it is the mortgage which acts as the security for the loan.
Most people believe that the security is the property, however, the property is an underlying security. If you really think about it sensibly, how on earth can the loan be secured by the property when you haven’t bought it yet?
You need the loan money to buy the property so, what is the actual security you give to the lender in order for them to give you the loan?
Believe it or not, the main security is your pledge to pay the loan back, with interest, over a defined but fluid length of time.
Your pledge to pay is actually a ‘promissory note’ as defined by the Bills of Exchange Act 1882. It is treated no differently by your lender, than the paper ‘money’ in your pocket which, as you can see by looking at it, is also a promise!
The bank notes, the word “note” being the operative word, are just that, a note, on a piece of paper, saying that it is a ‘promise’ to pay money to you who, in this case, is the ‘bearer’ or person owning the note.
So, when you promise to pay back the loan plus interest, your promise is ‘deposited’ by your lender and entered onto their balance sheet as an asset.
The ‘value’ of the asset the lender accepts, is based on the amount you want to borrow plus the total amount of interest you will pay over the term of the loan.
The total amount, or Future Value (FV), is usually over 3 times the amount you borrow. The lender will then calculate its Present Value (PV) at today’s current Bank of England base interest rate.
The PV is still approximately a little over 125% of the amount you want to borrow and it is against this new asset, the lender will advance new monies created and secured by nothing but your promise to pay.
Your mortgage, which is classed as a promissory note, will always have a value of more than the amount borrowed and, as such, can be sold, transferred or assigned by the lender, as they see fit.
How can they do this? To find out, you should read the terms and conditions of your loan and, let’s face it, none of us do this (even though we confirm and sign that we have).
You have All granted your lender the rights to do so, without your knowledge or further consent.
The fly in the ointment regarding the future sale or transfer of your mortgage, is the legal requirement that the lender will have to complete certain documents, in your name, and with your signature or your express authorisation to do so.
That’s where the Power of Attorney comes in!
What Power of Attorney? You may ask…..!
You are undoubtedly unaware that, within your loan application paperwork, you have signed over your rights to your lender, under a power of attorney granted by you, to them, giving them the rights to act as if they were you, and to do anything in your name that they see fit.
It will be irrevocable, which means you can’t remove it, it stays in place until all monies owed to them, by you, have been paid.
Even then, it could remain in force until YOU request they relinquish it.
I put the following question to all of you:
“If you were asked to give a total stranger the right to assume your identity, sell your possessions and control your bank accounts, would you do so? “
Of course not!
Oh, but you have, and you didn’t really know about it, and should!
Now, on to mortgage securitisation and how the lender uses all the above in order to sell your mortgage/promissory note and, in theory, the underlying security (your land/property) attached, to an unidentified third party, without telling you and to grant them exactly the same rights and privileges that you granted the lender in the first place.
To top it all, you may all be unaware that the new undisclosed ‘owner’ of your mortgage may have the rights to set interest rates, decline payment holidays, alter the terms and conditions of your loan and to package your loan into a bond or security offering and sell it to other undisclosed investors!
We all plod on, making our monthly loan payments to our original lender, in blissful ignorance of what goes on behind the scenes.
Why would your lender go to all this trouble?
The simple answer is they need to be able to create more money and loans and removing your loan as a liability from their balance sheet, enables them to do this.
From the point where your mortgage is securitised, all the lender is doing now is acting as a collection agent for the undisclosed buyer of your mortgage.
Money, Profit, Liquidity, Tax Advantages? The list goes on……..
Remember your ‘promise to pay’ has a future value (FV) with an income stream far larger than the amount you borrowed.
To give you an idea of what your promise is actually worth, let’s take a £100,000 loan today as an example.
What is its value in 25 years’ time? Well, obviously the £100,000 capital repayment is the starting point but what about the interest?
That could be two and a half times the amount borrowed, depending on the interest rate, so its future value would be £250,000 plus the amount borrowed in our example.
That’s a whopping £350,000 in total repayments over the 25 year term, a significant return in anyone’s mind.
Deposit interest rates today remain peanuts, so private investors, investment fund managers, pensions planners etc. all need to maximise their investors returns.
Any idiot can put money into a bank deposit account and get the didly squat interest rates, that can’t and won’t keep a pace with inflation. Can’t they!
What about a guaranteed income stream of 2% to 5% in the form of a Residential Mortgage Backed Security (RMBS) from a well-respected ‘AAA’ rated institution?
Sounds good, we’ll all have some of that, thank you very much.
A very attractive proposition by most of the mainstream players such as Credit Suisse, Deutsche Bank, and very well received by the investment community, predominantly in the United States of America, with Bank of America, Citigroup, J.P. Morgan, Goldman Sachs and pretty much everyone else, including the United States government under their Fanny Mae and Freddie Mac bond programs, all based on mortgages!
The question is how much does an investment bank pay for such an offering?
This is where your lenders dilemma pops up!
Do they wait for 25 years for you to pay what you agreed or, do they package your mortgage, along with thousands of others, and sell them for a very nice profit within a short period of time?
The advantage to your lender is a decent profit (could be as much as 20% and, in some cases, substantially more), the liability is off their balance sheet, the sale of the mortgage is without recourse (which means they are not responsible for any defaults) and, by securitising their portfolio, it frees up more liquidity enabling them to create more money, and the merry-go-round continues. …..
.....and the advantage to you is?
Nothing, Nowt, Nada, Zilch!
After all, you don’t know about any of this because, unwittingly, you gave the lender the power and authority to do it, without telling you!
They deliberately fail to disclose this even to H.M. Land Registry and remain as the named legal charge owner for what is believed to be the possible avoidance of having to pay Stamp Duty Land Tax (SDLT) on the whole ‘linked’ transaction. That would never happen, or would it?
What can YOU do about this?
So now you know that your mortgage was probably sold and your lender was paid in full and you might now owe someone else. So what!
How does this affect you?
You are still living in the property or renting it out, paying your lender and life is okay!
Should you do anything about this important news and is there any advantage if you do?
The answer is YES and, more importantly, there may be an advantage to YOU, if you are able to prove that your lender has in fact sold, transferred or assigned your mortgage in a securitisation programme.
You can do this yourself, it isn’t easy, but you can do it. However, there are professional people out there who can find deal with everything for you and at a very reasonable cost.
To make an informed decision, you need to understand what the advantage could be, and to weigh up the pros and cons to see if this is something you should look into further.
To give you an idea whether your mortgage is affected and if there are possible benefits to you, you first need to understand that your mortgage is probably one of the 80%+ of all UK mortgages securitised over the past 20 years or so.
Yes, you read that correctly. Over 80% of all mortgages!
There’s and 8 out of 10 chance that you could be eligible!
The second important item you need to be aware of is why you may be eligible.
IF your mortgage was securitised, then your entire obligation to pay your lender will have been satisfied in full, by the unknown third party who purchased your mortgage under the mortgage sale agreement from your lender.
Remember, your lender has done all of this in order to remove your loan liability off their balance sheet, so it is an absolute fact that YOUR loan balance, on the date the mortgage (not the loan) was sold, transferred or assigned, MUST have been settled and your obligations to the lender is now:
Zero, Nowt, Nada, Zilch!
You may have an obligation to pay someone else but, for that to be the case, the lender should have completed the paperwork correctly using your Power of Attorney, and the new ‘owner’ of your mortgage would have to prove that they are entitled to receive the continued payments from you.
In all honesty, I would find it difficult to believe that John Smith, a pig farmer in Nebraska, along with another hundred thousand or more unnamed investors, are going to be able to prove it.
The one thing you can be absolutely sure about, is the new ‘owner’ has not registered their interest in your land/property at H.M. Land Registry, which requires YOUR consent, and cannot be consented by the lender, on your behalf, using your Power of Attorney
If you have no knowledge that your mortgage was securitised, then it is an obvious fact that you did NOT consent to the amendment or change in the legal charge.
The sad thing is that in most, if not all cases, most borrowers would have agreed and consented to the securitisation, if asked.
The reason this was not requested is beyond the author of this article, but there must be a very good reason, which brings us back to the usual suspects:
Money, Profit, Liquidity, Tax Advantages!
So, back to YOUR possible advantages.
How could this benefit you?
Well, let’s think about the situation, IF your mortgage was securitised (if it wasn’t there is nothing more to think about and this issue doesn’t relate to you or your mortgage), you must understand that as a result YOUR debt to the lender was fully repaid, and if they correctly executed the paperwork, you now owe the same amount to someone else.
There is no benefit or potential benefit to you. So far so good, I hope you are all with me at this point!
You are NOT released from your Promissory Note or mortgage, you simply owe it to an unknown person or firm and, because the lender agreed with them to continue collecting your payments, it is business as usual.
There is, however, one glaring difference. The new owner of your debt is NOT named as having any interest in the underlying security which is, of course, your land/property, the original lender still being named as the legal charge holder.
To understand what this actually means to you, think about what a legal charge registered at H.M. Land Registry on the deeds to your property, really is.
I think we all know that, in reality, it is the legal trigger mechanism that is in place to try and make sure you pay your loan repayments on time, nothing more, nothing less!
If you do not pay your loan repayments and default on the loan, the named person/firm with a legal charge on your property can, after a set period of time, commence repossession proceedings and take the land/property from you, the deed holder.
The wording of the legal charge is almost the same for all secured land/property transactions, which you as the deed holder have consented to.
In effect, until such time as all monies owed by you, the named deed holder (borrower), to the named legal charge holder (lender) including any further advances, have been repaid, the charge remains.
That is it, in a nutshell!
As soon as the total amount of money owed by you to the lender has been repaid, (it does not state by who), then the legal charge has no further validity and should be removed.
The only thing the legal charge does, is stop you, the owner of the land/property, from selling or transferring it without the legal charge holder being paid the outstanding BALANCE owed to them at the time of the sale.
It does NOT provide any rights or claims to any other party so, ask yourself the question, if my debt to the lender
was fully repaid and I choose to sell the land/property, the lender should NOT be entitled to any of the proceeds from the sale, even if they were still named as having a legal charge.
You need to be aware that the same situation exists, IF the lender securitised your mortgage, due to the fact that they will have received 100% of the amount owed by you, to them, from the proceeds of the securitisation, which they did in your name using your Power of Attorney.
In legal terms you actually paid off your own loan or, to be more correct, YOUR ‘attorney’ did so.
The lender was acting as your agent or trustee and therefore must do so in your best interests, even if you did not know what they were doing.
This brings us to the whole reason for this article and the serious questions your lender should provide answers to:
“Did your lender securitise your mortgage, or not? …..
“If they did, please can we have a copy of the paperwork?
…….“What did the lender do with the money it received, and how much did they receive? …….
“Who is the new owner of my mortgage? ……..
“Does the new owner have the right to change interest rates and other terms and conditions? …….
“Where do we stand if the lender didn’t do the paperwork correctly?”
Many more questions spring to mind as we go on.
Under the Data Protection Act 1989, you have the legal right to request that your lender tell you or, at the very least, give you a copy of your mortgage loan account file.
What you need to ask for is called a Data Subject Access Request or DSAR.
The lender has 40 days to provide you with a copy of any personal data once you ask for it and have paid them the £10.00 fee they are allowed to charge you for the privilege of seeing what documents they have, or that is the theory.
The problem most people face is the fact that they simply do not know what they are looking for.