September 02, 2017

Do subprime borrowers or investors in mortgages benefit from securitization? No, now all profits go to intermediaries

Sir, Ben McLannahan, with respect to securitization of subprime mortgages quotes Julian Hebron, head of sales at RPM Mortgage with: “Making credit available to borrowers who are subprime is national policy and it is an important part of economic growth” “Financial crisis: 10 years on: The return of subprime” September 2.

Q. Do the subprime borrowers get any interest reduction from having their mortgages securitized, such reduction that could make these mortgage a safer investments for those investor who acquires these at lower rates? A. No!

Convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years, packaging it in a security, and then with a little help from the credit rating agencies convincing risk-adverse Fred that this mortgage is so safe that a six percent return is adequate, allows that mortgage to be sold for $510.000.

The $210.000 profit is now shared in it entirety by those originating the subprime mortgage, those packaging it, and those obtaining the excellent credit rating for the resulting security.

If that is “an important part of economic growth” that merits being part of a national policy, I don’t get it. Do you Sir?

If for instance 70% of those profits were paid back to those borrowers who lived up to their obligations, that would indeed imply a different and much more positive incentive structure.

Is that not something like for which cooperatives are often intended but not always achieve?