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Should banks buy back bad mortgages?

mark-jones

July 25, 2012

Brian Murphy is head of lending at MAB

 

While the UK doesn’t follow everything the US does sometimes by casting our eyes across the pond we can see some interesting trends. 

 

The one that caught my eye this month is the increased efforts by US investors to make mortgage lenders – Bank of America and Wells Fargo in particular – buy back ‘bad’ mortgages. 

 

This debacle has been rumbling along for a while but banks have revealed it has increased in recent months. 

 

Indeed Bank of America said that outstanding claims from investors surged 40% in the last quarter to $22bn in the second quarter.  

 

This raises an interesting question – should banks be forced to buy back loans?   

 

My view would be that if an investor did their due diligence and decided to buy a particular mortgage book then it is their responsibility.  

 

After all if I bought shares in a company which manufactured Betamax Video tapes then it was my decision – not a great one in hindsight but my decision nonetheless.

 

Another question is – what type of mortgages should banks be forced to buy back?  

 

In the US there are increasing claims from investors for banks to buy back loans which people have been repaying for the last couple of years but have now started to default on. 

 

Having been through the worst of the economic downturn this is generally true of a proportion of any borrower group and would not appear to be due to inappropriate loan assessment or necessarily lending to people who should never have been offered mortgages in the first place.

 

It would appear that these loans are ones that have been affected by the economic situation rather than being ‘bad’ in the first place.

 

However what is clear is that while banks should be focusing on lending it appears our US cousins are putting aside further capital to potentially repurchase these loans and that they are not surprisingly even more cautious about lending.

 

Will this happen in the UK? Hopefully not!  

 

We have a different regulator, different products and different legal system. However I would suggest that UK compliance departments will also be watching this with interest and we don’t need any more barriers to lending at the moment.

 

Indeed we’ve got a number of distractions to contend with as is. 

 

The Jubilee celebrations, the European football championships and in case you had missed it we are just about to kick off the Olympics, closely followed by the Paralympics all of which have and will be a distraction to those buying and selling property and conducting mortgage business.

 

Add to the fact that consumer confidence in general remains fragile with people worried about their financial situation as a result of the recession you could be forgiven for thinking it all looks fairly grim.

  

Putting aside these events that are outside of our control our National Mortgage Index shows that while the number of products available for intermediaries is down more than 90% from the market peak in May 2007, the past two months have seen the market stabilise. 

 

This follows a five month downward trajectory and we have seen a small increase in product numbers for the second consecutive month.    

 

In addition total mortgage applications are 6.9% higher for the six months to date compared to the same period last year.  

 

So what will happen next month?   

 

We envisage the next two months will be relatively flat with activity unsurprisingly curtailed by the summer holidays and the impending world sporting event – particularly in the South East where the logistics of basic activities like travel will be challenging in many areas certainly for the period of the games but I’m sure we will find something of interest to mention in this column.


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