Barclays and HSBC are on different ends of the mortgage crisis but between them they lost $6 billion from their exposure to the U.S. housing crisis and related credit crunch. HSBC lost money because of U.S. mortgages going bad, and Barclays lost money because of collateralized debt obligations (CDO’s) based on U.S. mortgages. The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. That is the CDO.
One should keep in mind that the U.K. mortgage market is not much better than the U.S. mortgage market. While some say the U.K. market is a bellweather that assumption is based on theories that the U.K. market is approximately 12 to 16 months ahead of the U.S. cycle. Analysts suggest that U.K. regulators did a much better job than U.S. regulators, but through it all Barclays and HSBC managed to lose $6 billion. The faint of heart must not look at the reset period for U.S. adjustable rate mortgages. We are just starting to see resets that should go on for two more years.
Why would HSBC and others actually work with borrowers to refinance their risky loans when the banks cannot sell the paper to investors? If a risky mortgage is already in a mortgage pool is there a tendency to refinance without altering the pool? If so, what happens to the chain of ownership and who actually has the deed to the property? What is the resulting impact of any future foreclosure, also known as repossession in the U.K.?