Wednesday, June 22, 2011

Your House May Be Owned by A Foreign Piece of Paper

It was reported recently, that New Zealand banks have been raising billions of dollars by issuing bonds to European Banks and Institutions in order to raise capital for the local market.

The collateral for these bonds are cash flows from a bundle of mortgages or other loans. Mortgages and loans that the Banks here hold as assets on their balance sheets.

In other words, your mortgage and your loan.

If a default on these bonds occurs by the borrowing bank here in New Zealand, then the bond holders can claim the assets backing the bonds as payment.

These are quite high-powered bonds and hence the reason why the Reserve Bank of New Zealand has limits on their issuance.

The good news is that Banks here are slowing down their issuance of these bonds. Banks don't want to borrow from Europe at the moment, the Greeks have spooked them. This means that money markets will be tight, and borrowing costs (interest rates) will rise.

Who then owns your mortgage? Which European Bank owns that piece of paper you thought the ANZ or the ASB etc owned?

The recent scandal of robo-signing home loans in the USA, has made people aware that when Banks use loan assets on their balance sheets as collateral, all sorts of legal nasties rear their heads.

For example, who actually has title to the house you own? With these bonds, is it the local bank or some Financier in Monaco? And when is he going to want his money (your house) back?

This may be another good reason to get those ownership papers from your bank when you have paid the last cent of your mortgage. You don't want any weird claims to pop up over your property. When one realises that your property is owned by the lender until the last cent is paid and the papers are in your hand, then you may want to get out of these mortgage contracts asap.

It seems odd that a bank can borrow against your mortgage in order to fund new mortgages. A strange tale indeed.

Please comment if you have something to add or you disagree with the reasoning.
Gold in New Zealand dollars: $1906 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $44.73 per oz
Previous all time high: $48.58
per oz

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