Jamie spells it out

IFR 2022 1 March to 7 March 2014
5 min read

I WAS STRUCK by an article I was reading recently about US banks continuing to outsource the mortgage servicing process and how mortgage service providers are again growing like topsy. This coincided with a report from Moody’s that indicated that it saw growing risks from those service providers going on to securitise their portfolios and looking to venture into the direct lending business. Spot the re-emergence of originate-to-distribute?

The article eventually went on to quote one Jamie Dimon describing home lending as “the most painful business ever”. Now, I might be a man out of time, but how can a sensible facility with a sensible LTV to a middle class family secured on its home be “the most painful business ever”? How screwed up is the mortgage business, formerly the mainstay of the most boring end of high street banking?

JUMPING BACK ACROSS the Atlantic, I have close friends with a problem. He is a Cambridge graduate in his 60s with a painfully expensive divorce behind him – she is in her 50s and owner of a very nice little flat in the heart of Chelsea worth the budget of a small African nation. From his divorce, he carries a mortgage on his house in a rural backwater, their main home.

Anyhow, they needed to roll over his mortgage but, despite them both being earners and one of them owning a valuable property outright in one of the most expensive real estate hot spots on the planet, the bank refused to refinance them. They have the cashflow, they have the capital assets but they can’t get a mortgage loan. On the other hand, the UK government is still running around using taxpayers’ money in order to offer irrevocable second-loss guarantees to borrowers who don’t meet the banks’ basic lending thresholds.

I was once quietly told that the difference between middle class and working class had formerly been defined as being the ability to obtain credit. That would mean the democratisation of the credit process would theoretically have done more to break down rigid class structures than any other social phenomenon. So far, so good.

However, in order to outsource mortgage servicing and in order to create an homogenous “product” that can be securitised in bulk, the mortgage lending process has had to be compressed into a framework of box ticking. If there is, as in the case of my friends, no box covering their situation then there can be no tick and if there can’t be a tick, there can’t be a mortgage.

I won’t harp back to the day when I put on my best shirt and tie, went to see the bank manager at Barclays in Fulham and was asked how I intended to ever repay over the next 25 years the princely sum £75,000 I hoped to borrow to buy a three-bedroom maisonette with a garden, but at the time the standing of the borrower was of paramount importance. Mortgage by internet? Perish the thought.

Authorities should take a much closer look at how and why loans are originated and then trafficked

WHEN MORTGAGE LOANS are again being bought and sold like cabbages in order to be securitised and flogged off to unsuspecting investors in MBS format (with default probability tables pinned to them based on algorithms designed to make the assets look nigh on risk-free) then the next lending fiasco must be in the making.

If the authorities really wanted to make banks of the mainstream and shadow variety alike safer, then they should begin by taking a much closer look at how and why loans are originated and then trafficked. That would no doubt end up reversing a goodly part of the democratised credit process, which would in turn be an electoral disaster for the political masters. Check, query and cancel.

Home ownership is surely one of the mainstays of modern civil society and to hear one of the world’s leading bankers describe lending in the sector as “the most painful business ever” makes me wonder what the hell has gone wrong. I do wish a bit more time was spent working through that one rather than jumping up and down trying to prove how a bunch of two-bit forex traders supposedly massaged the fourth decimal in dollar-euro.