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Article 28

05 October 2015
Richard Kemmish

Apparently it is the norm for securitisers in the United States – including Freddie Mac and Fannie Mae – to sell mortgages in arrears for a discount to their face value in order to realise, and therefore limit losses that might accrue to securitisation bond holders.

The companies that buy these mortgages have a very simple economic return, if they can realise more than the discounted price that they paid for the mortgages they make a profit. They have absolutely no duty of care towards the homeowners, recognise no liability for the initial mortgage being in error – for example in the case of miss-selling - have no on-going relationship with the homeowner and no concerns about public relations which so often temper the behaviour of banks.
I suspect that some of them aren’t very nice people.

My suspicions were reinforced by an article I read when in New York recently about the behaviour of some of these companies which is causing public controversy, even in a country so predisposed to the idea of the supremacy of creditor rights.

Of course I believe in creditor rights, do not support unduly lenient treatment of borrowers in arrears and make no value judgement here. I just want to point out the fundamental incompatibility of this type of arrangement with article 28 of the Mortgage Credit Directive.

Article 28 is the one which requires that mortgage lenders exercise ‘reasonable forbearance’, a pretty vague concept admittedly, but it is very clear to me that if the article means anything, it means that the behaviour of US special management companies is not the model that Commission wants European banks to adopt. 

To be clear, I am absolutely not saying that European securitisers behave in this way. On the contrary from my experience they go to great lengths to ensure equality of treatment for mortgage borrowers in and those out of a securitisation pool – even to the extent of changing IT systems so that the person managing the mortgage doesn’t know if it still belongs to the bank or to the bondholders. Furthermore they are all scrupulous about adhering to the Mortgage Credit Directive. 

But logically one of three things must apply. Either the American securitisation model is flawed – management of mortgages in a securitisation cover pool should not be according to a profit maximisation principle with all of the unacceptable outcomes that implies. Or a very different approach is required in the American credit culture to that which is required in a European credit culture. I would argue that we are seeing these cultures diverge further since the crisis, at least in part due to the differences in growth in the two economies. But this does imply that American and European securitisations are fundamentally different in nature. Or that the European securitisation model is flawed by its incompatibility with the credit culture that the European Commission seemingly support with the Mortgage Credit Directive.
I make no value judgement. But thoughts would be appreciated.

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