Mortgages holders club together to buy back mortgages

Justin Collery

Part of the bank resolution scheme will be the 'downsizing' of our banks. This will mean selling some of the loan book. These will be sold at a discount, the numbers being talked about vary, but could be in the range of 40% - 60%.

As things are setup the beneficiaries of this will be the purchasers of the debt.

I think the mortgage holders themselves should look at buying the debt.

If:
- you have a tracker mortgage
- are self employed, or otherwise look like a credit risk to the bank

and
- you have enough cash to pay 1/2 the principle of your mortgage
or
- have a good enough credit rating, or equity in your home to raise 50% of the capital of your mortgage

The mortgage holders themselves could form a consortium to buy their own mortgage book and reduce the capital of their mortgage by 50%. A single person walking in off the street will have some, but not enough leverage to get a deal from a bank. Get 100 people together, and it gets interesting.

Thoughts?

PS, here is how the conversation goes with the bank
JC: I'd like to pay off my mortgage please
Bank: Great, just sign here.
JC: How about we split it and call it quits, I'll pay half
Bank: Do I look stupid? You obviously have enough cash to pay the mortgage, why should I only take half the money?
JC: Mmm. Anyway, I have a tracker, your loosing money on it every month.
Bank: So, not 50%.
JC: And I'm self employed...
Bank: So?
JC: The loan is worth 100%, lets say you want to sell it. Knock off 10% for default risk, 10% as it is a tracker, 10% as I'm self employed, 10% collection costs, 10% as your a bust bank and your being forced to sell it, you get my drift, your never going to get close to 100% of the value if this loan. Lets do a deal.
Bank: I'll call head office....

Presumably the ones most likley to be settled would be the performing ones - why would the bank get rid of them.

Also if you had a tracker mortgage and cash in the bank earning interest where would the incentive be to go off the tracker, use the cash and go to a variable rate on the balance.

Overall the banks would be left with the riskiest loans on their books if it did happen.

Justin Collery

- the banks are loosing money on tracker mortgages, thats why they will sell them.
- the banks are being forced by the regulator/DoF to downsize. This means selling some of the mortgage book.

If you had cash in the bank, and wanted to follow my strategy, the first thing you would do is remove your cash from the bank.

The best loans the banks have are variable rate mortgages to government employees, followed by MNC's employees. If you do not fit this profile exactly, the banks will sell your loan, and take a hit on it.

Why let the purchaser of the loan take advantage, I am proposing a method where for once, the guy on the street can take advantage of the bank crisis.

We have a group of insolvent banks. Foreign banks will come into Ireland and do their damnedests to take all the good loans from the Irish banks. They have a number of tools at their disposal to do this. If some guy buys your mortgage from BoI or AIB at a discount of 50% thats the money he is going to make off your back, why let him? Individually someone else is going to make that money, collectively I am saying there is a way Irish people can take this profit.*


*Note in actual fact what I am proposing is a zero sum game, but the parsimonious do not end up paying for the profligate. It is one of the few ways the parsimonious can profit from this mess.

hmmm

Not a bad idea but there are some problems. For the ordinary non tracker mortgages, the purchaser will discount the package of loans not because they think they will only get a certain percentage back on each loan, but because they realise some loans will repay 100% and others will default. If banks sell a package of loans that are being repaid, the amount asked for the loans will be close to 100% of current value.

In the case of tracker mortgages, the loans will be discounted because the banks cost of funding exceeds the return from the loans. If the mortgagee used their savings to buy the loan, it is them which is suffering the opportunity cost of the loss of potential return from their savings offsetting the probably very low cost of the loan.

hiorta

This seems to be a feasible and practical idea and is almost the exact reverse of the Building Society founding principle.

Very neat.

greenasgrass

If you have 50% of the Mortgage value then this seems like a good idea. I don't think alot of people do or could access that money through the credit market.

I like the idea that the banks allow you to buy some of your mortgage back at a discount. I.e. you pay €20k to the bank but they remove €30k off the mortgage capital. Surely, at present, they are better with the €20k cash than the €30k debt??

If you are on a tracker and the bank are losing money they could incentivise this by offering a deal like the above and increasing the margin on the tracker rate or something.

Either way a bit of creative thinking could help the banks out a good bit.

Welease

The primary problem (i imagine) would be one of co-ordination. The banks would likely be looking to offload the loans to a small amount of purchasers rather than 10,000's individual mortgage holders..

Could those 10,000's of individual mortgage holders be organised into a coherent process to buy the loans and fund the purchase? Very doubtful unless some controlling organisation took over..

Justin Collery

Welease wrote: »

The primary problem (i imagine) would be one of co-ordination. The banks would likely be looking to offload the loans to a small amount of purchasers rather than 10,000's individual mortgage holders..

Could those 10,000's of individual mortgage holders be organised into a coherent process to buy the loans and fund the purchase? Very doubtful unless some controlling organisation took over..

This is to the crux of my post. I think it could be organised, but I am guessing one would need 100+ people from a single institution to do this. Is there 100+ people out there? How would we find them?

Alternatively, could we pressure the financial regulator to force the banks to offer any customer the same deal they are offering to an outsider to purchase the loans?

Welease

jcollery wrote: »

This is to the crux of my post. I think it could be organised, but I am guessing one would need 100+ people from a single institution to do this. Is there 100+ people out there? How would we find them?

Alternatively, could we pressure the financial regulator to force the banks to offer any customer the same deal they are offering to an outsider to purchase the loans?

We can do anything we want.. We own the banks.. Whether there is the political will to do so is another story sadly...

I see no reason why we couldn't tell the banks that for a period of 2 months.. lump sum payments off mortgages are given a discount of x% in order to lessen loan books..

I'd imagine the primary concern would be where is that money coming from.. taking it from the cash assets invested in a bank (your saving account for example) and paying off your mortgage doesn't really solve anything for the banks.. They have less loan exposure, but less assets.

Zynks

In my case the money is abroad, so it would be advantageous for the bank.

I am very interested in this or any similar initiative. If there is a meeting or something organised I will definitely join.

Welease

Zynks wrote: »

In my case the money is abroad, so it would be advantageous for the bank.

How common would that be though? Given the high levels of personal debt in this country, i would imagine the bulk of what exists (which probably isn't much) is mainly local.

Zynks wrote: »

I am very interested in this or any similar initiative. If there is a meeting or something organised I will definitely join.

Therein lies part of the problem.. Someone needs to spend the time and effort to organise this.. and it's no quick undertaking, we are literally talking potentially about organising people to pay over millions of not billions of Euro in order to purchase debt.. Not something a couple of individuals with good intentions would be in a position to do..

I personally like the idea (or some modification of it).. the people of this country who are bailing out the banks should get first option to lessen the hit.. The big question is how can this be achieved. I personally believe that if the political will existed, then the government could organise a group within the PS/Banks to manage the transferral of funds etc.

Dannyboy83

How high does the ECB rate need to rise before the banks start making money off the trackers?
Or at least not lose money on them?

Some of the commentary I read at Xmas suggested that ECB rates would rise by 1% in 2011 and 1% in 2012.
And at least the same again from Irish banking institutions.

1% on 250k over 30 years = €150 per month iirc.

That's why there is so much talk of a mortgage default tsunami.