Hedge funds hard on needy borrowers

The UK\'s most vulnerable borrowers could be subject to the profit-driven whims of unregulated hedge funds, experts warn.

Steve Khan, former head of residential trading at Morgan Stanley and proprietor of The Mortgage Trading Consultancy, says that hedge funds are the likely owners of most securitised sub-prime mortgage debt and are the least likely firms to work with borrowers to avoid repossession.

Khan says: “Sub-prime borrowers are more vulnerable and more likely to be held by hedge funds that will give no second chances and will not restructure loans the way that high street lenders would.

“For hedge funds, repossession is swift and aggressive, often taken through the courts by companies that specialise in quick repossessions.”

Khan says that while the Financial Services Authority has oversight with regard to securities servicers, it is ultimately portfolio owners’ decisions as to whether homes are repossessed or not.

He adds that hedge funds also operate outside the scrutiny of the public and have no interest in keeping clients on their loan books.

A spokesman for the FSA says the situation presents a genuine concern for the regulator and that it is looking to address the situation.

He says: “Although hedge funds are not regulated for mortgage lending, they will have to outsource regulated servicers to administer their books.

“We regulate all mortgage administrators that are fully responsible for ensuring their arrears handling complies with MCOB 13 and that they treat customers fairly.”

He adds: “Any third party administrator taking on mortgage servicing business from unregulated entities must ensure that such firms’ demands do not conflict with our regulatory requirements.”

The Hedge Funds Association was unavailable for comment as Mortgage Strategy went to press.