NEW YORK – A common thread running through dozens of bankruptcies in the mortgage industry this year is something known as a “margin call.”
Margin calls, in this case, mean the financial backers that provided the fuel for the housing boom are shutting down the pumps. Here are some questions and answers about what a margin call is and why it matters.
Question: What is a margin call?
Answer: A margin call is when a lender wants its money back. This can happen when you trade stocks on your Internet account using borrowed money and your stocks lose value. Or it can happen when mortgages or cars or bonds or anything else purchased with borrowed money loses value.
Question: Why does a lender have a right to force a margin call?
Answer: Lenders are not normally entitled to demand up-front repayment. A margin call takes place when collateral securing a loan loses its value. When that happens, there is nothing protecting the lender from its borrower defaulting, so the lender pulls the plug with a margin call.
Question: Collateral?
Answer: Most loans are secured by collateral. When you take out a mortgage, for example, the house you buy with that money is the collateral.
Though the terms are more complicated, Wall Street works the same way.
The lenders providing the financing for the housing boom mostly borrowed from banks such as Bear Stearns and Goldman Sachs under arrangements known as warehouse facilities. Under a warehouse credit line, a bank lends money to a mortgage lender, the lender funnels that money into mortgage loans, and the mortgage loans act as collateral securing the credit line.
Now that many of those mortgage loans are losing value, the banks are demanding their money back.
Question: For example?
Answer: Examples of this abound. American Home Mortgage Investment Corp., a lender based in Melville, N.Y., on Friday and Tuesday disclosed its lenders are forcing margin calls, though it declined to specify the amount.
Accredited Home Lenders Holding Co. has satisfied at least $190 million in margin calls since the beginning of the year
This is also what is happening with C-Bass LLC, a $1 billion partnership between two of the country’s biggest mortgage insurers. C-Bass bets on risky mortgages by buying home loans using borrowed money and packaging them into bonds and other complex investments.
C-Bass’ lenders have issued $550 million in margin calls this year, nearly half of that amount during this month alone.
Question: Why are the mortgages that act as collateral losing value?
Answer: Home prices have fallen and credit turned for the worse. Many lenders began reporting in February and March that people were not repaying their mortgages as reliably. The value of a mortgage loan is based on the value of the house securing it and the credit of the person making the monthly payments.
For most of the year, both have been dwindling. This has prompted an exodus from risky mortgage debt. The Wall Street banks do not want to be the ones left holding the bag if the situation is as dire as some fear.
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