Generally the bank that sold the original mortgage continues to service the debt. The debt is then classed as 'performing' or 'non performing' depending on whether payments are being made on time.
Once a mortgage is three months or more of arrears, it is considered in default. Once that happens, the debt has to be written down - technically to the amount the lender would collect in a foreclosure.
As mortgage backed securities are a bucket, the value of the paper would be determined by the ratio of defaults with an approximate write down based on the year of origination.When banks sold mortgages to other lenders who is responsible for the original debt in terms of enforcement if?
It very much depends on what aspect of the CDO they purchased. These debts were re-structured and restructured. Its worth understanding how these idiots did what they did. I spent all of summer 2007 in the west of the U.S. It was clear to me as an independent mortgage broker http://www.wwfp.net/mortgage/mortgage-br鈥?/a> that its economy and housing market were in trouble. It is typically 18 months ahead of the UK. In the U.S. (and UK) people with poor credit ratings were given loans that in normal situations they would not. As a consequence the housing market boomed because more people could buy homes. Demand exceeded supply and off you go.
At this point you could believe the numbers were out of synch i.e. soaring house prices, or you could believe all was well and a new world would ensue. Which was the better thought?
These mortgages would be called 鈥榮ub prime鈥? Clearly these lenders giving money to the sub prime borrowers needed to raise the money from somewhere. So some bright spark had the idea of bundling all the mortgages together and selling them off as an investment 鈥?today called a collaterised debt obligation (CDO).
Good thinking. So you have dumped your debt and grabbed the cash, and now you can lend more if you need. To me that鈥檚 a win all the way round unless of course if you have bought the debt 鈥?there cant be two winners can there, or am I being too educated about this. The new bank who had bought the debt was now paid interest by the borrowers.
In the meantime the bright sparks decided to trade these CDOs with each other 鈥?a bit like drinking out of the same pint at a pub with a gang of lads with the Flu.
Better still, someone thought, 鈥榣ets use the value of these CDOs to borrow against them to raise cash鈥? Even better still someone actually lent the money.
And so like every bubble, the U.S. housing market collapsed. That鈥檚 what bubbles do. Borrowers defaulted, houses where repossessed and of course a debt with no-one paying it back, secured against a house that鈥檚 worth less than the debt, is basically, well a very bad day at the races.
If you have then used that debt to borrow more, you have a house built with wet cards. And so the CDOs plummeted in value as no-one knew what was inside the CDO. Did it contain good debt or a bad debt?
During this period of absolutely shocking decision making, these 鈥榤anagers鈥?were getting paid fortunes in bonuses, and their future pensions would be based on these incomes.
In the dictionary the meaning of 鈥榖onus鈥?is 鈥榮omething given or paid over and above what is due鈥?- You aren鈥檛 kidding, so pay it back.
Disclaimer:
The answers above are for guidance only and should not be acted upon without you receiving professional mortgage advice relevant to your circumstances. To find an independent mortgage adviser please go to http://www.unbiased.co.uk
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