There are times as a journalist that you are genuinely shocked by stuff that crosses your path.
While we at MI Towers may not have the wide-ranging agenda that the likes of the BBC has, and therefore avoid things such as wars or humanitarian disasters, we do occasionally get exposed to stories which can really knock you for six.
While a report from Fitch Ratings on the underperformance of American residential mortgage-backed securitisations (RMBS) might not immediately seem important for the UK mortgage market, it soon becomes apparent that what you have in your hand is mind-blowing.
Reading through ‘The Impact of Poor Underwriting Practices and Fraud in Sub-Prime RMBS Performance’, some of the findings detailed are staggering and you can see why the problems which the US housing market encountered over the past 12 months have impacted so greatly over here.
One sentence spells it all out: ‘Fitch believes that poor underwriting quality and fraud may account for as much as one quarter of the underperformance of recent vintage non-conforming RMBS.’ Put simply, one in four non-conforming securitisations compiled in the US in 2006 shouldn’t have been because of basic failings with the mortgages they contained.
It isn’t solely lenders, brokers or borrowers who are to blame. It seems that everyone was at it. In a study of 45 files of non-conforming mortgages undertaken by Fitch, 44 per cent showed ‘questionable stated income or employment’; a further 44 per cent didn’t allow for the ‘payment shock’ of moving from the introductory rate to a higher rate; while 16 per cent and 10 per cent had clear signs of ID theft and signature fraud respectively.
Fitch’s broad conclusion of its research: ‘The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.’
A damning picture
But it wasn’t just Fitch’s investigation which painted a damning picture of the US market. In research conducted by BasePoint Analytics LLC, in an analysis of three million mortgages over a nine-year period up to the end of 2006, around 70 per cent of mortgages which had defaulted showed ‘misrepresentations on application’.
Looking at this report, you can see why millions of Americans are currently threatened by foreclosure. While stories of ‘NINJA’ and ‘balloon’ mortgages made it understandable, especially looking in from our position across the water, it isn’t until you see the figures that you appreciate the sheer scale of what was going on in the US non-conforming market.
However, it looks as if it all could have been avoided. As Fitch points out: ‘Although the sample was adversely selected based on payment patterns and high risk factors, the files indicated that fraud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to funding.’
Borrowers to blame?
So the stories that appear on the nightly news of families battling to remain in their homes after taking on mortgages they could never afford look set to continue for the foreseeable future.
But while there are many genuine cases of people caught out by unscrupulous brokers and greedy lenders, it appears that many foreclosures are directly the borrowers’ fault. The highest percentage of misrepresentations in the Fitch research was for what it called ‘occupancy fraud’, where a borrower, keen to take advantage of rising property prices, stated they were going to live in the property but instead used it as an investment.
According to Fitch, 66 per cent of cases showed this problem. Therefore, with house prices now declining in many parts of the US, these investments are being caught up and are driving further foreclosures.
The importance of the FSA
However, it is not just the US mortgage market that has been hit. As everyone in the UK market will be aware, the credit crunch on the back of the US non-conforming crisis has paralysed the capital markets which many lenders rely on for funding. From Victoria Mortgages to Northern Rock, profit margins have been hit and jobs lost as we try to adapt.
As Mark Sismey-Durrant, chief executive of Heritable Bank, points out: “This may be America but there are plenty of worries for us. The non-conforming market is closed to securitisations and a lot of people are now being rejected for credit cards. You can see problems brewing for those adverse borrowers who need credit.”
This only goes to show how inter-connected the global mortgage markets are, with a default in Cleveland, England, a direct result of a foreclosure in Cleveland, Ohio. It is even possible to draw comparisons between the Financial Services Authority’s review of self-cert and what has happened in America, with
affordability at its crux. While, in an extreme example, it goes to show what can happen when an broker doesn’t place the needs of the client first, the work that the regulator has done has ensured such a situation hasn’t occurred here.
As Richard Farr, director of the Association of Mortgage Intermediaries, says: “These are very different markets. While we have been affected by the knock-on effects, there is the danger of people tarring us with the same brush.”
So while you are cursing this Christmas as you fill in your Retail Mediation Activities Return, take a moment to think how very different the market could be if it wasn’t for the presence of an effective regulator.
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