Would you pay off your mortgage, or would you do something else entirely?

It happened again at the weekend. That makes it four times this month.

The scenario is as follows:

I’m in my local boozer, chewing the fat, catching up with mates over a few sociable beers, maybe the soccer is on the big screen.

After a time, when the bar becomes a bit more open and scattered, one of the regulars, more of an acquaintance than a friend, as such, sidles over to me and starts chatting.

The chat is about anything and everything, and is typically a laborious introduction before the inevitable segway that leads to the main order of business:

“But anyway Joe, I was just wondering, seeing as you might know a thing or two about it, what would you recommend as an investment if you happened to come into a bit of cash”

It’s funny how each of them said: “Say it was a round 50 grand”. In my eyes that must mean it’s closer to 100.

So clearly this is a case of the ‘haves’ and the ‘have nots’.

Four times this month.

A couple were cases of redundancy payments, and the other two basically dark horses who were evidently a bit more careful than the rest of us when the pre-2008 credit fueled party was in full swing.

It’s always an awkward issue to deal with, but the party line is always, “I’m sorry but I’m not really qualified to advise anyone, and particularly people that I know. It could only end in tears.

However if I came into that type of money, I’d make sure to proceed with caution.

I’d spend 5% on myself as a treat – perhaps a nice holiday; then I’d lash the rest of it into a secure deposit account in search of 3-4% yield.

And maybe if stretched I’d park 5% more to one side to invest in India and China. Because I think that a properly managed mutual fund that has decent management and track record in two promising looking economic stories, would also be an investment that is presumably far enough away from the economic basket cases that are the Anglo-Saxon countries.”

But hey, what would I know!

Or of course you could always consider paying off some of the balance on your mortgage! Usually also good advice.

And that got me thinking about mortgages...

I received a letter from my bank and mortgage provider the other week. They were encouraging me to consider paying a lump sum off the outstanding balance. And they were telling me in this nicely crafted piece that they would waive all ‘early repayment fees’.

All very charming and nice, but when you receive a letter like that, I guess it’s only right and proper to be suspicious.

And then that activated the mischievous department of my brain.

Some of the statistics are beginning to alarm.

The number of people defaulting on mortgage repayments for more than a year is increasing dramatically, repossessions do occur also, but not at all as widespread or headline grabbing.

Clearly one won’t be able to keep pace with the other, if and when things get worse. So my mischievous nature began to wonder what would happen if a mass movement of people suddenly decided to stop repaying their mortgages? A sort of ‘people before profit’ type alliance. This is not a call to arms by yours truly, but I am just imagining a scenario, so please don’t arrest me:

What would happen if 200,000 angry people all decided in unison and in a coordinated fashion, to stop repaying their mortgages? I’m thinking through this scenario, and I’m wondering would they actually get away with it? Repossession would simply not be an option at that stage.

And then I foolishly explored this notion a bit further by reading a bit about the mortgage market and the subsequent securitisation business in the States.

And I’m afraid I’m getting scared again.

Back in the day, Chuck and Amy would borrow their money from their local rinky dink Savings and Loan. A loan note agreement was signed, and stuck away into a drawer. Signatures. A deal is a deal. So if Chuck and Amy default, the rules are the rules and so the Savings and Loan guy can come and take the keys to the house back of them.

But years later these loans got repackaged, sliced, spliced, diced and pooled into investment bonds that contained 499 other loans. And they were tranched. And some investor in Sweden, or New Zealand, or Argentina, or Germany, bought these mortgage-backed securities. And they earned a yield depending on the default profile of the underlying loans. But of course the loan was no longer with the Savings and Loan. It was sold into the investment securities at a slight discount for cash upfront.

Happy days.

But happy for who?

If Chuck and Amy suddenly decide to stop repaying their mortgage, who is going to come and repossess the house.

It won’t be the Savings and Loan guy. They’re square. Will it be the guy from Sweden, New Zealand, Argentina, or the guy from Germany?

Well seeing as there is no loan note agreement between them and Chuck and Amy, no signatures, no security agreement, and seeing as they don’t have names, addresses, contact details, and seeing as this whole ugly mess straddles multiple jurisdictions, I very much doubt it.

It’s certainly not a helpful comment from a friend of mine when we discussed this at the weekend.

“Subprime Crisis: Act 2”.

I seriously hope note.

And don’t most plays have 3 Acts?