West Bromwich Building Society Tracker Margins Legal Action

Reply to the comment left by "Appalled Landlord" at "21/11/2013 - 20:01":

Appalled Landord - I don't think we can under estimate the importance the WBBS boards place on the Rating Agency, Fitch and also their Key Mortgage Funders, e.g. Hawthorn Finance Ltd et al.

WBBS are obviously looking to raise more so they can originate new Mortgages (albeit probably Owner Occupier and Not BTL) because they would like to leverage their available funds and also de risk their balance sheet and transfer the majority of liability/Risk away from the Mutual Group.

I doubt WBBS have been exhaustive with ALL of the possible Risk scenarios to Fitch et al with this Rate Hike, i.e. they will claim they have robust legal opinion to say they will remain unchallenged etc. Well, how do we know that the Ultimate Owners of our mortgages, the whole sale funders, are aware of what is happening from our side with a Legal Challenge ? Have they factored in and also 'Stress Tested and Risk Scenarios of Repossessing a 1000 + mortgages/properties in to their modelling ? WBBS have to factor in Risk scenarios for their Capital Adequacy Requirements to the regulators -

Have WBBS factored in the loss of income through tenants leaving the properties and the fact that most of these Lifetime Trackers are on interest only @75% of 2008 Values and will be in near or negative equity now and also the fact they will need to wipe circa 25% off the current Open Sale Market Values of the properties ? I doubt it and do WBBS really think they will follow through with the empty threats of calling in the loans ?

Well, why have WBBS not disclosed this scenario to the Rating Agencies and have they communicated this to the Ultimate Owners of our mortgages ?

What happens when the Wholesale Funding Market and Rating agencies realises WBBS may not be as 'good/effective/diligent' in originating New Mortgages ? This will certainly be an issue for them that they will not want opening and sharing in the murky world of securitisation and whole sale funding ?

Reply to the comment left by "Appalled Landlord" at "21/11/2013 - 20:01":

Further to my comment above, I have sent the following PS to my broker:

Hi

From a Fitch rating report: http://uk.reuters.com/article/2013/10/08/fitch-no-rating-actions-expected-on-hawt-idUKFit67127620131008 WB are only targeting 41% of their BTL mortgages. The rest are Scot-free.

Regards

Reply to the comment left by "stuart marshall" at "21/11/2013 - 19:12":

Stuart, you are a mine of information, and the Fitch report is extremely informative. I have included it below in full, with my comments/questions in square brackets:

“Fitch Ratings says that West Bromwich Building Society's (WBBS) planned 2% margin increase on 6,700 of its buy-to-let (BTL) tracker products due to occur on 1 December 2013, is not expected to warrant any rating actions on RMBS transactions backed by WBBS originated loans.

[This means 6,700 loans, not 6,700 borrowers, are affected.]

Fitch currently rates three WBBS-originated RMBS; Kenrick No. 1 plc and Kenrick No. 2 plc, both of which comprise 100% prime owner-occupied loans and Hawthorn Finance Limited Series 2008-A (Hawthorn), which comprises 100% BTL tracker mortgages.

[So our loans are held by Hawthorn. Who owns them?]

Hawthorn is the only transaction of the three which is affected by the margin increase.

The [rating] agency understands that approximately 41% of the current Hawthorn portfolio (94% of which are interest only mortgages) will be impacted by the margin rise.

[So there is no intention that the other 9,600 loans (59%) will have their rates increased. Presumably their account numbers start with 9, or the borrowers have fewer than 3 mortgages. So WB are targeting a minority of their BTL loans.]

In line with the existing portfolio distribution, the majority of the affected borrowers are currently paying rates of either 1.49% (63%) or 1.09% (19%). The remaining borrowers currently pay various rates, but no more than 2.49%.

[Is this true, that no-one is paying more than 1.99% above BBR?]

The margin hike will therefore increase the portfolio's current weighted average (WA) margin over BBR to 1.8% from 0.98%, which is equivalent to a subsequent WA interest rate of 2.3%.

[Applying a 2% increase to 41% of the loans raises the average by 0.82% , from 0.98 to 1.80, and adding BBR of 0.5% makes 2.3%.]

The increase in interest rates will impact the Hawthorn transaction in a few ways.
First off, given both assets and liabilities pay BBR-linked rates, there is no interest rate swap in the structure.

[Our loans are the assets. WB’s borrowings are the liabilities. So both are paying BBR-linked rates. Interesting. The question is, how much premium is WB paying over BBR?]

The immediate effect of the hike is therefore an expected increase in revenue, which would translate into an approximate uplift in available excess spread of up to 80bps per annum of the collateral balance, providing the issuer with additional cushion to cover losses.
Secondly, while the prevailing low level of interest rates paid by borrowers has likely been a strong driver for the robust performance seen since transaction close (three months plus arrears stood at 36bps of the outstanding pool as of August 2013), a rise in payable interest rates would double the average monthly payment of these borrowers, equivalent to an approximate rise of GBP180. Hence, this will likely result in some borrowers struggling to meet these higher payments.

Fitch understands that WBBS's underwriting guidelines incorporate an affordability assessment based on stressed interest rates of 6%. An approximation of the interest coverage ratio (ICR) using the gross rental income at loan origination pre and post the margin hike suggests that the WA coverage ratio for the Hawthorne portfolio could decrease to half of the current 4.5 figure, if all loans were affected. However, considering the market average rental yield of about 6%, the agency expects that there would be sufficient cushion for the majority of borrowers to absorb the additional margin. Nonetheless, this could leave borrowers more vulnerable to future interest rate shocks.
Finally, while in some instances an increase in rates might encourage borrowers to refinance elsewhere, Fitch does not believe prepayment rates will be materially affected in this situation. While the portfolio is relatively seasoned, this also means that 85% of the mortgages were originated during the peak of the market in 2007. Hence, the agency would not necessarily expect prepayments to increase significantly, particularly given that the increased rate of up to 3% over BBR remains fairly comparable with current market rates.

[So Fitch does not think we will be able to re-mortgage elsewhere.]

Overall, the net effect of the rate hike is expected to be neutral, which would not warrant rating actions on this transaction, particularly in consideration of available credit support (21%) for the rated class A notes.”

There's an article in the FT Adviser Stop the disingenuous rate hike excuses, it was posted 8hrs ago. can someone please link it to here as I don't know how many thanks.

how exciting.

Mark, do you know Ray Boulger that seems to be the Media Darling of the Press with regards to mortgages ?

http://www.ftadviser.com/2013/11/21/opinion/blogs/stop-the-disingenuous-rate-hike-excuses-0G4Bgme96EoGKnExL3PZDL/article-1.html

Reply to the comment left by "ian " at "21/11/2013 - 21:47":

Article in ft

http://www.ftadviser.com/2013/11/21/opinion/blogs/stop-the-disingenuous-rate-hike-excuses-0G4Bgme96EoGKnExL3PZDL/article.html

Reply to the comment left by "Appalled Landlord" at "21/11/2013 - 19:24":

Not sure if I can get an accurate answer, suffice to say that both Fitch & Moody report that our mortgages were funded via WBBS and they linked it to a Base Rate Tracker themselves. In 07/08 UK base was circa 6 - 7% and since 2009 UK base has been 0.5%, so I struggle to see how their funding costs have increased since they originated all of our mortgages.......

Much has been said today about the ethical failure of the Co-op Bank’s activities and apparently many are searching to find an ethical alternative and finding the Nationwide, resulting in a windfall of new business for them.

If the activities of WBBS were brought to the attention of ratings groups such as http://www.ethicalconsumer.org I believe it would have a detrimental effect on their rating and thereby chances of acquiring new business.

I would do this myself, but can’t help feeling it would carry more weight coming from people directly affected.

Sorry to be a pain there one in yesterdays Telegraph Regulator warns Tracker Rate Rises could be unlawful

Reply to the comment left by "David Vickers" at "21/11/2013 - 22:01":

Snippet from article:
In a ‘Dear CEO’ letter signed by director of supervision Clive Adamson, the regulator stated that it is “concerned” factors driving changes to standard variable rates may not always be “transparent” to consumers and that it may breach regulatory principles.

Sounds to me like it is right on the money.

However, Mr Boulger does not believe that addressing mortgage rates is top of the FCA’s list, adding that the regulator had originally promised the publish a paper this year but decided against it. It has offered no hints on when in 2014 we can expect it, either.

Buy-to-let is not regulated by the FCA so this will not apply to West Brom, but both of the above cases highlight what is in my view nothing short of disingenuous smoke and mirrors by providers.
The quicker the FCA acts to set an example here, the better