The blogmaster read Wild Coot’s (Harry Russell) weekly column with interest and came away with a couple takeaways which maybe more poignant than the former banker touched on.
We live in a capitalist driven society which is ‘defined’ by churning economic activity with the aim to make profit for the capitalists. We can theorize to rival the Adam Smiths and John Keynes’, however, the reality is that the domestic and global market is undergirded with capitalist intent.
What does this have to do with Russell’s article?
It is obvious to this lowly blogmaster the banks offered to defer mortgage payments because increase delinquency in the portfolio would have translated to a reclassification of non performing loans and therefore negatively impact the profit and loss account. Russell’s “advice was to try one’s best not to accept this offer as catching up on mortgages is always difficult even when there is an improvement in circumstances“. Although good advice in theory there is the reality – too many Barbadians have opted for sizeable mortgages because they ‘qualify’ and not because of exercising the best judgement based on present and future states. For example, you work in a fickle industry like tourism, why commit to a 25 years mortgage for maximum value because you qualify? We criticize government for mortgaging our children’s future and at the household level we take the same decisions. Then again, the sum of decisions taken at the household level defines the society we live in. Is this where our education system both formal and informal is failing?
The government is by no way excused from supervising a governance framework to protect citizens from corporates, this is its job. The flipside however is where does personal responsibility for start and finish for making smart financial decisions.
The purpose of this brief preamble to Wild Coot’s article is to provoke thought by those making life altering financial decisions anchored in simplistic thought instead of commonsense [Oxford definition: good sense and sound judgment in practical matters].
With hard ears you feel
A FEW MONTHS AGO I warned Barbadians that they might have been buying a pig in a poke. When there was a drop in tourism, people in the industry were unable to pay their mortgages on houses or cars for three months, even longer.
Banks offered people the chance of deferring mortgage payments for three months. My advice was to try one’s best not to accept this offer as catching up on mortgages is always difficult even when there is an improvement in circumstances.
The question above all is, “did you carefully read your mortgage before you signed it.”
Perhaps banks saw an opportunity to impose commission for these deferments. Maybe banks were not looking far enough down the line.
Remember banks had just experienced substantial losses from Government bonds and feared another hit on mortgage payments.
If the mortgage that you signed gives the bank the authority to sell or transfer the mortgage, then you need to take heed. Get your copy out and look.
Now that many mortgages are still in arrears and banks are unable to earn on them, banks want to get rid of the mortgages. If banks get rid of these mortgages, then any losses incurred would be charged against future profits. Thus banks would be tempted to clear their books of these loans.
They may have been able to put the properties up for sale. Such action gives the bank a bad image in the eyes of the public. In any case the bank has to justify that the eventual price at which it has disposed of the property was the best price available.
When you sign a mortgage, you may give the bank the power to sell the property or the mortgage. The sale of the mortgage does not change the monthly premium due under the mortgage. There are other people in the business of buying mortgages and would be interested in what the bank wants to do. Such businesses also have a duty to account to the mortgagor a reasonable price if selling of the property has happened. However, these companies do not carry the same image vis-à-vis the public as the banks.
As I have already stated in another article, if your house is worth $400 000 and you have a mortgage of $200 000 (not a bad case), if the mortgage can be sold, a mortgage buyer can be offered the property (mortgage) for $150 000 (the bank is claiming a tax loss of $50 000) that is probably worth $400 000.
Change rate of interest
The new holder of the mortgage has taken over a mortgage of $200 000 for which he has paid $150 000 on a property worth $400 000 but not the same case that hamstrings the bank.
This is the same problem that faced shareholders in 2008 in America.
There are mortgage buyers all over the world. They can be local or foreign. What is also important is that more often than not the mortgage that you sign gives the holder of the mortgage the ability to change the rate of interest unless there is a limitation period in the mortgage. This is more trouble for the mortgagor as then there is no competitive aspect to the mortgage rate.
The bank providing a mortgage will perhaps only be prepared to sell your mortgage if it is going out of business or if you are badly in arrears.
The important point is that if you have signed a mortgage, you are obligated to the mortgagee so long as your mortgage gives the right to the bank to sell the mortgage. The new mortgagee is not out of pocket as the original bank (first mortgagee).
There are many reasons that an entity holding a mortgage has to be concerned about especially where the mortgage covers buildings. The question of ensuring that insurance is paid up to date will arise. The decision to pay the insurance premium if there is an arrear is paramount. The new mortgagee has less at risk and may not be prepared to foot the premium.
He may be relying on the net value of the land in case of a fire.
This means that a mortgagor must be more alert when in the hands of a new mortgagee. Repairs to the property also have to be considered as the new mortgagee has less at stake, having expended less in acquiring the mortgage.
The question of whether or not the mortgage seller gets a fair price for the property will depend on the condition of the property, the location and the market.
Harry Russell is a banker. Email email@example.com (Source: Nation)