BANKS and speculators are attempting to offload mortgage default risk onto unsuspecting taxpayers and pension funds amid fears of a looming property crash in London, ethical finance campaigners have warned.
Last week, it emerged that the Greater London Authority (GLA) is seeking to use residential mortgage backed securities (RMBS) to diversify its investments. At present, there is little direct investment in RMBS by council treasurers. However, the GLA’s proposal looks set to change this trend.
Speaking at an event in central London, GLA chief investment officer Luke Webster said the body will adopt the financial instruments if London Mayor Boris Johnson gives them the go-ahead.
‘The GLA is certainly sold on the RMBS investment case. So, subject to the mayor’s approval, we will be investing in this asset class,’ he said. RMBS would be run by external managers following a procurement process. Credit specialist 24AM, which currently manages over £3 billion ($4.27bn) worth of asset backed securities, is one such contender.
Ethical finance researcher Joel Benjamin said residential mortgage backed securities played a significant role in the global financial crisis. Amid growing concern over a looming crash in London’s luxury property market, he said that the timing of the GLA’s announcement is significant.
Benjamin accused banks and speculators of unloading mortgage default risk onto the backs of taxpayers and pension holders. He said the GLA’s investment plans had been sparked by a desire to avoid financial turmoil in the face of a property crash.
In column on the Open Democracy website he said: ‘For the past two years, I have been researching borrowing undertaken by UK local government, both from the HM Treasury in the form of loans from the Public Works Loan Board (PWLB), and from private banks, in the form of PFI and LOBO loans, with research and activism collective Debt Resistance UK.’
A LOBO (lender’s option borrower’s option) is a long term borrowing instrument available in the UK. It involves periodic interest re-fixings, which incorporates two linked options:
• lender’s option: option for the lender to set revised (usually higher) interest rates at predetermined interest reset dates such as annually.
• borrower’s option: linked option for the borrower (exercisable only if the lender’s option is exercised) to pay the revised interest rate or to redeem the bond although that may involve exit fees.
LOBOs are provided by banks and the loan contract runs for between 40 and 70 years. There is no regulatory body responsible for overseeing their use. Benjamin says: ‘Put simply, the interest rates on both PWLB loans, and on LOBO loans and PFI have been rigged in favour of HM Treasury and the City of London banks, and the interest repayments are now crippling UK local government.’
