Originally Posted by
DW
Let's assume the following scenario.
Assuming you are Bank A (where A is a local bank), and you have a mortgage loan customer with LTV=80% at signing and drawdown back then. This borrower is a good customer and has been paying his mortgage payments on time. LTV now falls to say 75%. You ask the customer to top up 5%. Customer says he has money to make the monthly mortgage paymetns but no money to top up the 5%. You discuss this a number of times with this customer, after 4 weeks, he is still not able to top up. Your next course of action available is then to exercise your right to enforce security, apply to the court for foreclosure on mortgage asset, extinguish the equity of redemption held by the owner, and power of sale (pursuant to the terms of the mortgage loan).
I do not think people are arguing if the banks will ask you to top up or not, the real question is if banks will really enforce security, file for foreclosure on the mortgage, apply to the courts to extinguish the equity right of redemption, and proceed to enforce their right to power of sale. The legal process typically will take quite a while, say 3-4 weeks. From the time the bank determines LTV is 75%, the Borrower refusal to top up (after multiple consultation), application to court for power of sale, and eventually reception of actual proceed of the sale (if they get to sell it off successfully), it will be quite a while. At that time, LTV may even be at about 65% or 60%. Banks then take an approx. 20% write off against their funded exposure.
Now, if you have a customer whom have originally been paying their mortgage payments on time, why would a bank want to go through this enforcement, in the process take up reputational risk, and credit write off. Once you enforce security and foreclose on the asset, you are effectively giving up on a paying customer whom have been satisfying his loan obligations but simply not able to top up the shortfall in LTV ??
If you are the credit committee of the bank, are you able to stand up to the argument of enforcing the security notwithstanding
(i) your customer has been making good on his mortgage payments; and
(ii) considering the bank faces a highly likely prospect of loan write off (not even provisioning)
if they take such an enforcement action given the time lag in process and prices in a falling market.
Assuming the above holds true, the bank who decide to exercise their rights to enforce will have to
(i) commit resources to this particular work-out,
(ii) incur legal fees (though under the loan docs you probably have right for these to be reimburse, but we are talking about a forcing a bad loan into enforcement with potentially recovery rates of less than 90%(potentially)),
(iii) and other OPE expenses.
Like we discussed above, chances are, the banks will be more than happy if they can already recover their principal loan, not to mention these enforcement expenses (both in terms of management time, staff resources, legal risk and most importantly, reputational risk, and social good-will). Given the light of the above, two questions.
Q1. Would you actively pursue a policy of requesting performing loan assets to top up? and
Q2. Have you have seen this or have direct personal experience in such top ups leading to enforcement action by the bank (realisation of equity investment loss).
I am not sure how many of the forummers here have really been through a work-out situation with the liquidation counsels of a bank or is it just plain thoughts thinking wild and aloud in your own minds that banks will act or behave in a certain fashion. For those whom have direct experience in a bank top up situation, leading to enforcing (i.e. realisation of investment equity loss event) on the same, please share.
Personally, I firmly believe that the enforcement route is never the bank's preferred route or recovery. In fact, in most cases, recovery rates are usually lowest by way of enforcement. Banks typically do not adopt the enforcement action unless it is the absolutely last resort. If you have a paying customer, banks are usually quite happy. Consequentially, requesting customers to top is not often preferred if they already know it is likely to lead them to a worse off position that what they could have achieved, if the customer has been and is still continuing to make timely payments.
I invite everyone not to take my word for it. Talk to your independent insolvency counsel and make your own judgement and views on the same. By the same token, for those who would like to speak and voice their views, you are naturally welcomed to do but please do so with logic, reason and structured and grounded arguments. Often, we see hand-waving comments and views, unsubstantiated irrational remarks both from a credit point of view; operationally/institutionally impractical from the banks' point of view.