Saturday, September 27, 2008

Saturday Question

If a bank does go under and is not saved, for example Northern Rock, what happens to those people that have mortgages with the bank? Specifically what happens to their property? Who do they owe the money too?

45 comments:

Born Today said...

They would owe the money, minus any deposits, to the creditors of the bank.

nought.point.zero said...

I asked a friend this same question the other day and he said something about how most mortgage debts are packaged up and sold to other financial services companies and one of them will come to take your debt eventually. But it would be pretty good if you could go from £100s in debt to owning your house outright overnight.

Lilith said...

I think they owe the money to PCW or Andersons or whoever is Administrator.

Stu said...

IIRC the bank's mortgage agreements normally get bought up for junkyard prices - so had Lloyds bought Northern Rock they'd take over all the mortgage payments...

TheFatBigot said...

Both the debt and the charge over the house are property owned by the bank.

When a bank goes under (ie ceases to do business) it does not cease to exist. It still owns the right to receive the monthly repayments and it still owns the right to claim your house if you don't pay.

There are various ways in which a failed company can be dealt with but the essence of them all is that someone comes in and sells the assets to raise money to repay those to whom it owes money.

All that happens, therefore, is that another bank buys both the right to receive repayments and the right to repossess your house if you default. Your obligations remain exactly the same but they are now owed to someone else.

Anonymous said...

The liquidator. Or more precisely, the bank in liquidation. The terms and conditions of the mortgage will not change - providing the borrower continues to pay the mortgage, he or she shouldn't see any difference. Of course, the terms may say things like the interest rate is only fixed for a couple of years after which it will revert to the bank's variable rate. Clearly, while a trading bank will want to set a competitive variable rate to keep existing customers and attract new ones, a bank in liquidation may set that rate uneconomically high to try and get rid of its existing customers. In practice, a liquidator would probably seek to sell the bank's mortgages to another bank which was a going concern and which wanted to expand its business; the borrower would then find that its mortgage had effectively been switched to another bank. That bank couldn't change the terms of the mortgage though. Of course, at the moment, finding a bank prepared to be a buyer would be challenging to say the least...........

Barnacle Bill said...

Good question young Dizzy, but I would still like to know who in NuLabor had mortgages with Norther Crock before it was nationalized?

Anonymous said...

If a bank fails, then I presume it goes into adminstration. It is then the job of the administrator to get the most for any 'assets' of the bank.
The mortgages would pass to the purchaser of the 'assets' of the failed bank.
The mortgage would be owned by the new purchaser.

Anonymous said...

The Liquidators.

Martini said...

The terms of your loan will be taken over by an administrator & it will be held by them indefinitely or until another lender takes over the loan book.

Anonymous said...

The receiver sells their debt to the highest bidder. While in receivership the payments are treated the same.

Edward said...

Diz, I hope your question is not a trick one based in existentialism rather than the real world?

The various mortgages that a failed bank has forms part of its assets that will be used to pay off, so far as is possible, its liabilities. This will be done via the liquidator, receiver or administrator, depending on what type of bankruptcy the failed bank has filed under.

Edward said...

Oops I pressed sent on my previous comment too early as I now realise I did not answer your specific question.

Nothing happens to the property as the owner has not done anything wrong. The mortgage will typically be sold to another bank and that other bank will be owed the money according to the terms of the original mortgage.

Hope this clears things up? :-)

Anonymous said...

The failed bank or building society remains a legal entity. It is managed by an administrator, receiver or liquidator who is responsible for realising all assets. A mortgage loan is such an asset. Even though it may take 25 years, the administrator maintains the infrastructure to collect interest and repayments. In practice he/she will sell the loan on to another lender earlier than that. However in the case of older loans the documentation may require the borrower's consent.

kinglear said...

They owe the money to the liquidators until such time as they sell off the mortage to a real bank.
Actually, Brown et all could pull a blinder by buying B&B for Northern Rock, then buying any REAL mortage the banks wanted shot of - at a 20% discount. The whole situation would resolve itself almost overnight.

Anonymous said...

The borrowers still owe the money to the bank. Liquidators are appointed to realise assets and pay creditors (to the extent that they can: some creditors rate higher than others; shareholders come last). If there are secured creditors then they might appoint receivers who, in effect, get first helpings over any assets which are charged to secure their debts.
What would happen in practice to borrowers from a failed bank is that their contract would be assigned (sold) to another bank and they would have a new bank to deal with but on the same terms as those which they had with the failed bank.
So no major difference to them.
If the government legislated to give those with credit in their bank accounts absolute priority on the failure of a bank (as Mervyn King has suggested for some time) then there would not be such a great problem if a bank went under.

bank said...

The (court appointed?) bankruptcy administrator will probably have a keen interest in the bank's creditors...

Anonymous said...

The liquidators on behalf of the bank`s creditors and shareholders. Presumably the liquidator would attempt to sell the mortgage book to a solvent lender to raise cash to pay off the creditors. Thosse who hold mortgages are not off the hook! They are, after all, the principal asset.

G Eagle Esq said...

Dear Dizzy

PLUS CA CHANGE,
PLUS LA MEME CHOSE

[the more it changes, the more it's the same]

Borrowers should NOT be worried if their Mortgage Lender goes bankrupt, because the Borrower's "legal" position remains unchanged

A. nothing happens to the Borrower or his property, which the Borrower continues to own, subject to the Mortgage

B. the only change is that the Borrower will owe the Mortgage to the Lending Bank's Liquidator or to whoever the Mortgage debt is sold to

On the Bankruptcy of a Lending Bank :

1. the Lender's assets will be transferred to the Lender's Liquidator, who will inherit the rights and the obligations of the Lender

2. the Borrower continues :

2.1 to own his/her property SUBJECT TO the Mortgage

2.2 to owe the Mortgage debt on the same terms - the Borrower must still pay it back as required by the Mortgage

3. Thus the Lender & his Liquidator will not be able to require repayment any earlier than is required under the Mortgage

4. What will change is that the Mortgage will have to be repaid to the Lending Bank's Liquidator or to whoever buys the Mortgage debt

I have the honour to remain your obedient servant etc

G Eagle

Mr Jabberwock said...

The bank would not cease to exist and the money would still be owed to the bank, which would go in to some sort of insolvency process and an administrator would be appointed who would either continue to collect the repayments or much more likely sell the mortgage book as an asset to another bank.

Methinks said...

As far as I know they keep paying and the receiver sells the mortgage book on elswhere for whatever price can be realised.

BigDai said...

The mortgage they have is an asset of the bank and would be sold with anyother.

Anonymous said...

The administrator would sell the mortgage on. The T&Cs, offer and application form will all have mentioned that the mortgage can be fully or partially assigned to anyone the mortgage holder, agents or successors see fit. I work as head of credit in a specialist lender and have already batted away borrowers coming along this line of attack.

Cyclefree said...

The administrators would seek to recover the assets and those would include the mortgages owed by borrowers. The likelihood is that administrators would seek to sell the mortgage book to another bank in order to recover monies for the bank's creditors. Depositors would have £35,000 protected by the Financial Compensation Scheme.

Ken said...

You continue to owe the debt to the failed bank. It doesnt cease to exist, it merely seeks bankrupty protection. This does not absolve the debtor of his liabilities. Indeed those liabilities represent an asset for the bank that can be sold. The corporate "person" does not disappear because of bankruptcy. Only when the entity is wound up does it cease to exist.

mitch said...

The administrators sell the loan book and take a fortune in commission.
I had a company go under while I worked there and I still get mail about it after 7 years oh and a cheque for £80.

Anonymous said...

The charge on the property (mortgage) will form part of the liquidators' assets and so the money will be due the official liquidator. In practice much of the money received will go to fund the liquidators' fees!!

trevorsden said...

the banks creditors?

Zac the Impaler said...

The key to understanding this is to look at mortgages in terms of assets and liabilities. For the borrower, a mortgage is a liability (money flows out). For the bank, a mortgage is an asset (money, in the form of interest, flows in). Whoever winds up the bank will therefore sell these assets on to someone else, just as all other assets are sold to pay off creditors.
For the borrower, there is no change financially. The name of the instutition to which the money is paid may change, but that is all.

Anonymous said...

They would still owe their money. The loan is the bank's asset and would most likely be sold onto another bank (with the contract still having to be honoured by both parties), with the proceeds of the sale going to the bust bank's creditors.

Anonymous said...

If it is securitised, then they owe their money to the bond investors who bought the securitised asset. If it is on the balance sheet of the bank then they owe it to whomever goes after the bank's assets.

bodo said...

Owed to the administrators, who have a duty to extract maximum value from the bank's remaining assets.

Anonymous said...

The Receiver

JuliaM said...

OT, but you may be interested to hear that Helen Clark plans to plead 'not guilty' over her obscene drunken rant in the Great Northern Hotel...

Given the video evidence, good luck with that!

Anonymous said...

Dizzy

No expert, but the receiver would sell the mortgages to the best bidder and then use the receipts to pay off creditors. I think.

The homeowner will then be liable to maye their repayments to the new owner. All they'd know about it would be some unintelligible letter telling them that they were now paying AN Other bank.

SP

SP

Ralph said...

I would assume the charge holder would remain the bank, and their assets would be owned or at least controlled by the Receiver.

Anonymous said...

Good question Dizzy but as you owe a defunct bank dosh , then that is the problem of the defunct bank and all those that come to the rescue of the defunct bank.

A more pertinent for savers is, How long will it take to pay out the £35K WARRANTY and will it come with interest?

In short borrowers have little to lose and savers a whole headache.

CityBoy said...

As people have said, the terms & conditions stay the same; you'll initially make the payments to your bank (now run by the administrator), then your debt will be flogged off and you'll make the payments to another bank.

BUT (that's a big but), watch out for the interest rate, especially if you're on a short-term fixed rate deal. When that runs out, perhaps the new owner wants to force you to pay up so that they can take the cash and make a quick profit. So they jack up the interest rate. Fine if you've got a good credit rating, you can just get a replacement mortgage elsewhere. But if no-one else will have you, you could be in trouble.

canvas said...

The most important point is that borrowers should keep up with their mortgage payments as per normal - no matter what happens.

Shades said...

Something I only recently found out is that if you have an offset mortgage, the £35k protection does NOT apply in the normal way- instead it is just applied directly to the mortgage netted so whilst you may suddenly find your mortgage owing is (up to) £35k lower, your savings have gone.

Denz said...

its not as clear cut as popular belief would have it!

the banks administrator sells the mortgage to the highest bidder - the bank can no longer enforce the mortgage as its gone bust - it no longer has a valid credit license to trade with.

what puzzles me is that if the bank goes bust, administrators then sell the mortgage on, if signed documents cannot be presented should a CCA letter be sent to the "new" owners of the mortgage, within 12 working days, could the mortgage be enforced?

a regular debt can be wiped out if the signed document cannot be presented on request, if the bank going bust cannot locate the original documents that are signed then a legal challenge may be possible to have the mortgage wiped off, leaving the individual with full possession of their house?

this could be a huge benefit to thousands of mortgage holders should a bank be allowed to collapse instead of being bailed out?

Denz said...

i forgot to post....

why dont the administrators offer the mortgage back to the individual, for the discounted price they would be selling it on for?

Anonymous said...

Shades (18.27; 28 Sept) sounds wrong to me.
It is basic principle of liquidation that there be a set-off of sums owed by A to the insolvent company against sums which the insolvent company owes B. Only the balance (whichever way it goes) is recoverable. So if A has a mortgage of £200,000 offset against an account in credit of £100,000, the £100,000 is set off against the £200,000, leaving a balance on the mortgage of £100,000.
But if the balance were the other way round (£100K mortgage; £200K credit in bank account), the mortgage would be paid off in full and A would get £35,000 for his £100,000 credit plus anything else the liquidator paid out to unsecured creditors (usually sod all).

tory boys never grow up said...

Would be an interesting question as to whether the borrower could offer to buy back their own loan at a discount. If the borrower offered 80p in the pound for their own debt - while the administrator could only get 60p in the pound if they sold the assets as a job lot - wouldn't the administrator/liquidator be bound to accept the best offer?

MO said...

CityBoy raises a worrying possibility, which is that the buyer of the mortgage portfolio from the defunct lender may change the terms once a fixed rate deal has expired. Anyone know if that is actually allowed or has happened?

Equally worrying is the possibility that the buyer of the loans may cherry pick the least risky borrowers from the package held by the bankrupt bank, and drop the others. I'm an expat living in Africa, self-employed and hard to prove my income. It was a hell of a job to get a UK mortgage and if I was dumped by the buy-out bank I'd be unable to get a new loan in the current risk-averse environment. Anyone know if the bank that buys the loans from the bankrupt bank has the right to cherry pick in this way, or to drop some borrowers?