Mortgage investments continue to haunt the giant investment bank Goldman Sachs after UK regulators have followed on from their US counterparts and levied a fine of $31 million.

The Financial Services Authority has slapped the wrist of the Goldman dealers because they failed to disclose that they were under investigation for alledged fraud by the US regulatory authorities. It all harks back to the infamous mortgage investments which were basically dodgy bets dressed up to look like A grade opportunities. For many observers, this was the straw that broke the Camel’s back and sent most of the globe into a massive recession which kicked-off in 2008.

The fine is just a fraction of the $550 levied by the US authorities – the Securities and Exchange Commission – but is concerned more about disclosure, than any wrong doing that might be discovered, including the alledged fraud.

Goldman Sachs should have come clean say the UK about the charges in the US. The mortgage investments in question were complex mechanisms designed to put the best possible light on a worrying housing crisis in the US. Many of the investments were sold just prior to the US housing market suffering a major rupture and becoming completely unstuck within months.

The problem arose because the mortgage borrowing market was being ‘alledgedly’ rigged, effectively allowing anyone to gain a mortgage. Previous safeguards such as credit checks went out of the window. Unlike the UK, householders in the US can just hand back the keys and walk away from the borrowing commitment, meaning that the whole situation was being built on a fragile and weak base. Catastrophe seemed the only likely result.

The FSA fine is one of the largest ever imposed by the authority. They were annoyed particular that a trader under investigation in the US who was said to behind the allegedly ‘dodgy’ mortgage derivatives, had been moved to London and therefore came under the auspices of the UK authorities.

Goldman Sachs has kept mum about both fines and has always maintained that it has not done anything wrong legally. The US case centres on the fact that a Goldman Sachs client had major input into a mortgage portfolio which was then sold to clients. What the Bank did not do was then admit that its client – a major hedge fund – had then bet that the value of the securities (which they had helped choose), would fall. The mortgage vehicle known as Abacus went onto lose around £1 billion when the US housing market suffered its inevitable collapse.

The huge US fine did not see any admission of legal wrong-doing from Goldman Sachs, who instead claimed that the marketing material for the Abacus fund had been incomplete.

Many experts feel that Goldman Sachs were given not so much a get out of jail free card, but nonetheless should have been more aggressively prosecuted for fraud. They say that the fines should be seen against a backdrop of profits which saw the Bank book a staggering $3.5 billion gain in the first three months of 2010. And although profits dropped to just over $600 million for the next three months, no-one can say that Goldman Sachs is near the bread line.

One thing is for sure, the US mortgage debacle is likely to haunt Goldman Sachs – and indeed Wall Street and the City of London – for many decades to come.

Guest Article by Neil Camp

The recent report from the Financial Services Association (published 13.07.10) made the point that the share of interest only mortgages has been increasing.

It said that at the peak of the market, over 30% of all mortgages taken out were interest only.

And what worries the Financial Services Association, is that many people taking out interest only mortgages do not have a suitable financial vehicle to pay them off once they are due. A large number of people rely on house inflation, or other plans (such as a windfall, or hoped for inheritance) to see them through at the end of the mortgage term.

These findings were part of a larger report which made a number of observations. Most worryingly was that nearly half of all households with a mortgage had either no money left, or indeed had a shortfall, every month after the payment of the mortgage and living costs.

This has encouraged the Financial Services Association to enforce lenders to ensure that people can actually afford the mortgage they are thinking of signing-up, has signalled the virtual ending of the self-cert mortgage (where people verify their own income) and told financial institutions to be more aware of possible problems with their borrowers should they start falling behind on payments. It stated that those borrowers with a damaged credit history were very vulnerable.

As for arrears charges for those that fall behind on their mortgage payments, the Financial Services Association conducted a review, as part of their report, and discovered that there was a wide variation in penalty fees across the market.

The Financial Services Association reminded lenders that mortgage rules exist which state that arrears charges should be based on reasonable costs incurred by the lender as a result of their customers being behind, rather than linked to punishing penalty charges. In other words, the charges should mainly cover the administrative cost of being in arrears.

The Financial Services Association is asking the mortgage industry and consumers for further views on interest only mortgages and the state of the industry in general. Responses should be completed by 16 November, 2010.

Guest Article by Neil Camp

In a move which many see as the ending of self certification mortgages, the Financial Services Authority has just outlined tough new proposals on mortgage lending.

The Financial Services Authority has said that it intends to ensure that all borrowers can afford to pay back a new mortgage.

In its new super role as consumer protector and day-to-day supervisor of the financial services sector, the Financial Services Authority is overseeing mortgage companies to make sure that responsible lending is once again the order of the day.

Observers see this as a direct attack on self certification mortgages which helped fuel the economic downturn. Many people taking out new mortgages were effectively encouraged to borrow too much by being able to quantify their own earnings. This resulted in inevitable abuse as borrowers were over generous in assessing their own income levels and some actually fabricated their own figures to gain a mortgage.

The Financial Services Authority, FSA director responsible for the mortgage market, Lesley Titcomb, said:
“There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.

“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”

The Financial Services Authority main proposals are:

• imposition of affordability tests for all mortgages;
• enforce lenders to be ultimately responsible for assessing a customer’s ability to pay;
• insist on verifying the income of the borrower on every mortgage application, which will prevent self-certification abuse and reduce opportunities for fraud;
• create increased protection for customers who are vulnerable and suffering from poor credit histories.

Industry experts say that the Financial Services Authority is a little behind the times, as most lenders have either voluntarily tightened their lending rules, or have been forced into doing so because of the new economic realities.

The age of the self-certification mortgage is over.

Guest Article by Neil Camp