Saturday, October 31, 2015

Just When You Thought the Sub-Prime Mortgage Was Dead

…it’s back, at least in England.

An interesting and somewhat frightening article by Rupert Jones appeared in the Guardian today and it took my breath away.  

One either learns from history or becomes the victim of it and subprime mortgages are pretty recent history. One can imagine the victims lining up and they are (of course) the marginally desperate. The timing is predatory as well.

Home prices in England, particularly London, are among the highest in the world. They are already looked upon as a housing-bubble. According to the article several Australian investment banks are hot and heavy into what you and I had likely assumed was an illegal and discredited market scam. Scam may be too loose a term, but if it quacks like a duck and waddles like a duck—it probably is a duck.

According to the Guardian piece, “Sub-prime mortgages, widely blamed for causing the 2007-08 financial crisis, are making a surprise comeback in the UK, with several new lenders launching home loans for people with poor credit histories.

“Lenders are targeting people who have faced serious financial problems including repossession and bankruptcy – as well as those with more minor blots on their records – for the mortgages, which come with interest rates as high as 8%.

Seems the fox is back, sniffing around the hen-house.

So here’s the deal: mortgages for those who have resources are at an all-time low in England, as low as 1.5%. Australian ‘investment banks’ are offering those who have had bankruptcies or other financial failings (in their words) a chance at home ownership. A lovely sentiment indeed.

Yet that chance is wrapped in the clothing of destitution and failure. Here’s what it’s wearing to the ball: the rags of a life on the edge, desperation in their eyes and a mortgage rate five to six times the rate offered to the more financially secure.

The well to do would be crippled by those terms, not to mention those on the edge. The exorbitant rate itself is evidence of failure. But remember, these are investment banks and such institutions are simply disinterested in rates of failure. Their interest lies in maximizing profit for investors.

So, how do they do that? The old-fashioned way, by creating a chain of immediate profit and letting the devil take the hindmost.

These mortgages are not available to walk-in clients. Borrowers must be referred by brokers and financial advisers, each of whom get an immediate finder’s fee. Because they are investment banks, they will no doubt slice and dice these mortgages into investment vehicles and send them off into the wild blue yonder of unaccountability. Sound familiar? In this context, a vehicle is a getaway car.

Matt Andrews, managing director of Bluestone Mortgages, said: “We don’t like the term sub-prime – it implies these customers are somehow inferior to prime borrowers, which they are not.”

I’ll just bet you don’t like that term, Matt.

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