Fraudulent Self Cert mortgages and problem Mortgage Backed Securities
Posted on 14 May 2009 by
At Tuesday’s FSA Conference Managing Director Jon Pain said that a lot of self certification mortgages lent by specialist lenders has led to large numbers of arrears and frauds. If the FSA failed to recognise “large numbers of … frauds” were being committed it says as much about their failure to regulate adequately as it does about the lenders’ success at fraud prevention.
Mr Pain said: "Some lenders, knowing they ultimately do not bear the financial risk of consumers' inability to pay, [have not worried] about affordability, either because they can sell on the mortgages by packaging them up and selling them on; or they believe they can rely on house prices to rise, [with] repossession ultimately providing a safety net - but not for the consumer."
This demonstrates very clearly the problems that can arise when lenders are allowed to securitize without any recourse for arrears and bad debts, although my understanding is that most securitisations did effectively have some element of recourse. The most obvious lesson from this is that when the securitisation markets return the originating lender must continue to be on the hook for a proportion of any ultimate loss.
Another clear message is that investors need to do proper due diligence in future before buying any mortgage backed securities and not take the lazy option of relying on potentially flawed analysis by one or more of the credit rating agencies, all of which have been discredited by even bigger failures than those made by the regulators. If investors had bothered to take the trouble to understand what they were being asked to buy most would not have bought into some US mortgage backed securities. That would have prevented some lenders from continuing to originate new mortgages and hence the current debacle would have at least been mitigated.
Lenders, rating agencies and regulators have rightly been criticised over the causes of the credit crunch but lets not forget the foolish investors, and in particular the Chief Executives of those companies, who didn’t have the expertise to understand what they were buying. They are equally culpable.
Categories: Mortgages, Regulation
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