"Securitized" Mortgages and Foreclosure
March 9, 2009 1:06 PM Subscribe
Financial pundits and politicos keep repeating the mantra that "toxic" mortgages can't be renegotiated because the mortgages were sold off, split up into a thousand pieces, and fragmented as part of the whole process of creating mortgage-backed securities. My question is, why doesn't that same logic also hold true in reverse when a foreclosure occurs (i.e., if we don't know who owns it, how can anyone foreclose on it)?
It's repeatedly claimed that no one knows who owns all of these little pieces of mortgages. For example, in the current mortgage rescue plan, immunity for loan servicers is included because they claim that immunity is needed from the institutions that bought these mortgage pieces if the servicers are to going to renegotiate these terms. One of the fundamental tenets of foreclosure law is that the mortgage holder seeking foreclosure has to prove that it owns the mortgage it is seeking to foreclose. If these mortgages were in fact carved up into a million little pieces, which we have to assume many were because that's the industry's talking point mantra, then how can one lender/institution claim the right to foreclose it if that particular mortgage has been "securitized?"
It's repeatedly claimed that no one knows who owns all of these little pieces of mortgages. For example, in the current mortgage rescue plan, immunity for loan servicers is included because they claim that immunity is needed from the institutions that bought these mortgage pieces if the servicers are to going to renegotiate these terms. One of the fundamental tenets of foreclosure law is that the mortgage holder seeking foreclosure has to prove that it owns the mortgage it is seeking to foreclose. If these mortgages were in fact carved up into a million little pieces, which we have to assume many were because that's the industry's talking point mantra, then how can one lender/institution claim the right to foreclose it if that particular mortgage has been "securitized?"
I just read an article somewhere in the past few weeks about this. Basically, some folks are delaying the foreclosure of their homes by requiring the mortgage holder to provide the original documentation to prove they own the mortgage. And evidently finding this documentation is proving to be a big problem. FWIW.
posted by raisingsand at 1:18 PM on March 9, 2009
posted by raisingsand at 1:18 PM on March 9, 2009
Here's an AP article on the "produce the note" tactic of fighting foreclosure mentioned by raisingsand.
posted by exogenous at 1:23 PM on March 9, 2009
posted by exogenous at 1:23 PM on March 9, 2009
What was often carved up into little pieces was not the underlying mortgages, but obligations on a certain portion (a cut) of their future interest payments pooled together.
Yes, so you end up with the situation where you do know exactly who owns the mortgage -- the "company" that created the security -- but it can't be easily renegotiated because the payments are already promised to the owners of the derivative securities.
posted by smackfu at 2:02 PM on March 9, 2009 [1 favorite]
Yes, so you end up with the situation where you do know exactly who owns the mortgage -- the "company" that created the security -- but it can't be easily renegotiated because the payments are already promised to the owners of the derivative securities.
posted by smackfu at 2:02 PM on March 9, 2009 [1 favorite]
what smackfu said.
this part of the question: It's repeatedly claimed that no one knows who owns all of these little pieces of mortgages.
is incorrect. The problem isn't finding the owners of the mortgage-backed securities, it's notionally collecting them into one place to agree on how to re-divide the smaller-than-expected and quite pungent pie that they bought.
posted by troy at 3:01 PM on March 9, 2009 [1 favorite]
this part of the question: It's repeatedly claimed that no one knows who owns all of these little pieces of mortgages.
is incorrect. The problem isn't finding the owners of the mortgage-backed securities, it's notionally collecting them into one place to agree on how to re-divide the smaller-than-expected and quite pungent pie that they bought.
posted by troy at 3:01 PM on March 9, 2009 [1 favorite]
Best answer: In a securitization, the trust owns the pool of mortgages and pays the servicer a fee to do all the work. What you call "owners" are really bondholders and the bonds they hold are liabilities of the trust. Usually the original mortgage originator owns the "equity" portion of the trust and acts as servicer, but not always. The biggest servicer in the US are WaMu, Wells Fargo, GMAC, BofA, etc.
Foreclosure is not a renegotiation--it's a contractual right given certain circumstances. The servicer can act on behalf of the trust to enforce its contractual rights and the securitized bondholders have nothing to do with it. But if the servicer wanted to change the contracts, then the bondholders would have a say based on the terms of their bonds. With the bonds so widely held, getting this approval is a herculean task.
posted by mullacc at 3:09 PM on March 9, 2009 [2 favorites]
Foreclosure is not a renegotiation--it's a contractual right given certain circumstances. The servicer can act on behalf of the trust to enforce its contractual rights and the securitized bondholders have nothing to do with it. But if the servicer wanted to change the contracts, then the bondholders would have a say based on the terms of their bonds. With the bonds so widely held, getting this approval is a herculean task.
posted by mullacc at 3:09 PM on March 9, 2009 [2 favorites]
Best answer: Here is how this should work, and why it shouldn't be THAT complicated. To make a mortgage backed security (or any asset backed security for that matter), collateral -- to wit, individual mortgages bought from originators (e.g., banks, mortgage brokers) -- is placed in a trust managed by a trustee. That trust issues bonds to the investing public: these bonds are the mortgage backed securities purchased by the investing public.
Now, mortgage backed securities (MBS) issued under the aegis of Freddie Mac or Fannie Mae (FHLMC, FNMA) have credit protection -- to wit, default insurance -- provided by FHLMC or FNMA. As such, the loans in their pools have to meet certain underwriting requirements and are what is referred to in the business as 'conforming loans.' It is worth noting that these underwriting requirements are far more stringent than what qualifies for a loan under private mortgage brokers, the source of some of the worst "toxic waste" out there. It is also worth keeping in mind that FHLMC and FNMA did not accept subprime paper from originators until the politicians (our elected officials) put enormous pressure on them to do so back in 2007 when the subprime end of the mortgage market started to slide, and they thought that FHLMC and FNMA could take some of the pressure off market by buying up some of the paper. They complied, but under protest. (So don't blame them for this mess.)
But I digress.
To return to the original question. Normally, if a loan in a FHLMC or FNMA pool defaulted, FHLMC or FNMA would pay off the loan, and pass an amount equivalent to the remaining principal outstanding through to the trust managing the pool. To the investors in the MBS backed by that pool, the principal paid off would flow through to them as a "prepayment." From the investors' perspectives, this type of pay off event is no different than when a person with a mortgage pays off the mortgage prematurely or chooses to pay it off faster than scheduled (e.g., by sending in larger monthly payments than required).
A normal refinancing of a mortgage is a prepayment of this type. When someone refinances, the bank or other party doing the refinancing pays off the old loan and underwrites a new one. So if that old loan sits in a trust supporting an MBS, the principal flows through to the investors of the MBS as a prepayment. Whether the new loan winds up in an MBS is a function of whether the bank wants to hold the loan or not, but this new loan does NOT get substituted for the old loan in the original trust.
(Note: private issuers of MBS normally would / should hedge their risks that mortgages in their pools could default, but I am less clear on the mechanism of payoffs. Obviously their insurance in this regard has not worked well.)
A large part of the current problem is that many people have mortgages that they would like to refinance, but for a variety of reasons can't meet the underwriting standards of banks. Since the government has decided to bail people out of their mortgages, all it has to do is set up an agency to stand in for the banks through which it would pay off the remaining principal on the mortgages outstanding (and which pay-offs would flow through the established mechanism as prepayments to investors in MBS's) and underwrite new loans for the homeowners. They could subcontract this function out to banks who already have a lending infrastructure in place.
In short, it really doesn't have to be as complicated as the politicians and others are making it.
I'm sorry this is as long as it is: I tried to make it short.
posted by SuzB at 3:53 PM on March 9, 2009 [2 favorites]
Now, mortgage backed securities (MBS) issued under the aegis of Freddie Mac or Fannie Mae (FHLMC, FNMA) have credit protection -- to wit, default insurance -- provided by FHLMC or FNMA. As such, the loans in their pools have to meet certain underwriting requirements and are what is referred to in the business as 'conforming loans.' It is worth noting that these underwriting requirements are far more stringent than what qualifies for a loan under private mortgage brokers, the source of some of the worst "toxic waste" out there. It is also worth keeping in mind that FHLMC and FNMA did not accept subprime paper from originators until the politicians (our elected officials) put enormous pressure on them to do so back in 2007 when the subprime end of the mortgage market started to slide, and they thought that FHLMC and FNMA could take some of the pressure off market by buying up some of the paper. They complied, but under protest. (So don't blame them for this mess.)
But I digress.
To return to the original question. Normally, if a loan in a FHLMC or FNMA pool defaulted, FHLMC or FNMA would pay off the loan, and pass an amount equivalent to the remaining principal outstanding through to the trust managing the pool. To the investors in the MBS backed by that pool, the principal paid off would flow through to them as a "prepayment." From the investors' perspectives, this type of pay off event is no different than when a person with a mortgage pays off the mortgage prematurely or chooses to pay it off faster than scheduled (e.g., by sending in larger monthly payments than required).
A normal refinancing of a mortgage is a prepayment of this type. When someone refinances, the bank or other party doing the refinancing pays off the old loan and underwrites a new one. So if that old loan sits in a trust supporting an MBS, the principal flows through to the investors of the MBS as a prepayment. Whether the new loan winds up in an MBS is a function of whether the bank wants to hold the loan or not, but this new loan does NOT get substituted for the old loan in the original trust.
(Note: private issuers of MBS normally would / should hedge their risks that mortgages in their pools could default, but I am less clear on the mechanism of payoffs. Obviously their insurance in this regard has not worked well.)
A large part of the current problem is that many people have mortgages that they would like to refinance, but for a variety of reasons can't meet the underwriting standards of banks. Since the government has decided to bail people out of their mortgages, all it has to do is set up an agency to stand in for the banks through which it would pay off the remaining principal on the mortgages outstanding (and which pay-offs would flow through the established mechanism as prepayments to investors in MBS's) and underwrite new loans for the homeowners. They could subcontract this function out to banks who already have a lending infrastructure in place.
In short, it really doesn't have to be as complicated as the politicians and others are making it.
I'm sorry this is as long as it is: I tried to make it short.
posted by SuzB at 3:53 PM on March 9, 2009 [2 favorites]
SuzB I like your explanation. How can we get those elected officials names out in public?
posted by notned at 4:17 PM on March 9, 2009
posted by notned at 4:17 PM on March 9, 2009
In short, it really doesn't have to be as complicated as the politicians and others are making it.
Save for the fact that I find my taxes going to bail out people who from their own stupidity and/or greed bid up houses past the point of affordability (keeping me in apartments since I got back from Japan in 2000) to be highly repulsive. Heads they win tails I lose. Um, yeah.
That's why cramdowns are not part of the deal yet. They still may be but resistance is high.
posted by troy at 5:57 PM on March 9, 2009
Save for the fact that I find my taxes going to bail out people who from their own stupidity and/or greed bid up houses past the point of affordability (keeping me in apartments since I got back from Japan in 2000) to be highly repulsive. Heads they win tails I lose. Um, yeah.
That's why cramdowns are not part of the deal yet. They still may be but resistance is high.
posted by troy at 5:57 PM on March 9, 2009
^ then again if things are refi'd via gov't without principal cramdowns then my objection above is unfounded.
posted by troy at 5:59 PM on March 9, 2009
posted by troy at 5:59 PM on March 9, 2009
I had the pleasure of working with April Charney (mentioned in exogenous's AP article) when I worked for Legal Aid in Sarasota. But it was after she moved to Jacksonville and worked for legal aid there that the foreclosures took off. She began challenging ownership of the notes. Only the note-owner has standing to foreclose. And nearly every foreclosure contain a count to establish a "lost" note. She now holds seminars on staving off foreclosures on this basis. Smart lady. A dogged representative for the have-nots.
posted by Jezebella at 7:18 PM on March 9, 2009
posted by Jezebella at 7:18 PM on March 9, 2009
Troy, I don't think it's quite as simple as that. First, they aren't "your" tax dollars anymore, they are the US government's. The way we choose how "our" tax dollars are spent is by holding elections. Secondly, I'm pretty sure most of the people whose mortgages will be "fixed" aren't the stupid ones. And they will still have to pay back (most) of it. Third, there are broader implications to letting people's mortgages fail. It's one of those "marginal case" kinds of things- if it takes a few of "my" tax dollars to keep someone paying their mortgage, that's way better for everyone than letting it fail- the costs to the individual family and to society will be WAY higher than what it cost to prop up the mortgage.
(Kind of like bailing out Chrysler back in the 80's- they didn't fail, the government made a profit. Or, we could have let them fail and all the shareholders, workers and car owners would have been screwed. And probably still on the dole in some way or another.)
Seconding SuzB and mullacc- MBS aren't literally pieces of mortgages being sold off. There's a layer of abstraction between the actual mortgages and the buyers of the securities. It's kind of like a partnership- one entity that many people own pieces of. As they said, it's just a fundamental of contract law- can't change a contract unless the parties to the contract agree.
posted by gjc at 7:27 PM on March 9, 2009
(Kind of like bailing out Chrysler back in the 80's- they didn't fail, the government made a profit. Or, we could have let them fail and all the shareholders, workers and car owners would have been screwed. And probably still on the dole in some way or another.)
Seconding SuzB and mullacc- MBS aren't literally pieces of mortgages being sold off. There's a layer of abstraction between the actual mortgages and the buyers of the securities. It's kind of like a partnership- one entity that many people own pieces of. As they said, it's just a fundamental of contract law- can't change a contract unless the parties to the contract agree.
posted by gjc at 7:27 PM on March 9, 2009
Save for the fact that I find my taxes going to bail out people who from their own stupidity and/or greed bid up houses past the point of affordability (keeping me in apartments since I got back from Japan in 2000) to be highly repulsive. Heads they win tails I lose. Um, yeah
I think the best way to look at this is to try to not put a personal emotional angle on it like you would when someone you knew was involved in some moral failing.
This is a systemic problem. Large macro economic forces created this. Essentially, a lot of money from sophisticated investors flowed into a model of real estate investment which was very vulnerable to collapse if a lot of the generally held assumptions about the market were true. When a lot of people misread this and thought MBS were a good investment, a whole lot of money crowded in to the market. Those who originate mortgages attempted to respond to the demand for mortgages to securitize by signing more and more people up. The actual people who market and sign people up for mortgages get a piece off the top with no downside risk, so they advise consumers they qualify for loans when it isn't in their best interests. Junk fills up the system.
The answers are systemic as well. During this period, some people will try and appeal to those emotions by portraying this as a giant morality play. It isn't. Its an asset bubble. Listen to the voices providing calm answers.
posted by Ironmouth at 9:56 PM on March 9, 2009
I think the best way to look at this is to try to not put a personal emotional angle on it like you would when someone you knew was involved in some moral failing.
This is a systemic problem. Large macro economic forces created this. Essentially, a lot of money from sophisticated investors flowed into a model of real estate investment which was very vulnerable to collapse if a lot of the generally held assumptions about the market were true. When a lot of people misread this and thought MBS were a good investment, a whole lot of money crowded in to the market. Those who originate mortgages attempted to respond to the demand for mortgages to securitize by signing more and more people up. The actual people who market and sign people up for mortgages get a piece off the top with no downside risk, so they advise consumers they qualify for loans when it isn't in their best interests. Junk fills up the system.
The answers are systemic as well. During this period, some people will try and appeal to those emotions by portraying this as a giant morality play. It isn't. Its an asset bubble. Listen to the voices providing calm answers.
posted by Ironmouth at 9:56 PM on March 9, 2009
This thread is closed to new comments.
posted by fatllama at 1:11 PM on March 9, 2009