Mortgage Complexity
By Steven A Leahy
Years ago families looking to finance the purchase of a home went to a local bank and applied for a home loan. The bank did an investigation of the potential borrower and, if they decided to make the loan, received monthly interest and principle payments from the borrower until the loan was paid off. This financial arrangement is straight forward.
Fast-forward: Today most mortgage loans are sold off in the secondary market, rather than serviced by the local bank. The purpose of the secondary market is to create liquidity by allowing banks to sell off loans to third parties and use that money to make additional loans. The secondary market also keeps loans uniform, with lower interest rates to borrowers. The secondary market, however, complicates the mortgage loan process. Instead of just one bank involved in a residential mortgage loan, the secondary market necessitates multiple players: Originators, Aggregators, Trust Companies, Security Dealers, Investors, and Mortgage Servicing Companies.
Most mortgage loans begin with a mortgage loan broker. The broker connects the borrower with a loan originator. As the name suggests, the originator of the mortgage is involved in making a new loan. The originator gathers information from the borrower, and completes and processes the application before the loan appears on the lender’s books. The originator is the lender that appears on the original loan paperwork, the promissory note and mortgage.
After it appears on the lender’s books, the loan is sold off, usually to a “Loan Aggregator” (sometimes referred to as a “Sponser”). Loan Aggregator’s are large mortgage organizations with ties to Wall Street and/or one of government-sponsored enterprises (GSE), Fannie-Mae or Freddie-Mac. Loan aggregators buy mortgages from the mortgage originators, or originate loans themselves. The mortgage loans are packaged, or “pooled,” then securitized into private label mortgage-backed securities through Wall Street, or Agency mortgage-backed securities through one of the GSE’s.
The pooled mortgage-backed securities move to Security Dealers. The Security Dealers create financial products to benefit investors. The products are described as mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized mortgage obligations (CMO) or collateralized debt obligation (CDO). Each financial product spreads the risk of individual mortgage loans over many loans and investors.
These financial packages are placed in a Trust. The Trust becomes the “owner” of the mortgages. However, the Trustee’s interest is solely for the benefit of investors. The trustee does not have an economic or beneficial interest in the mortgage loans and has no authority to manage or otherwise take action on the loans. The Trust maintains investor/securities records, collects payments for the Servicer, and distributes payments to the investors/securities holders.
After the mortgage loans are pooled, securitized and placed in a trust, the security dealers sell shares in the financial products to investors, both large and small. For investors, these mortgage-backed securities are much like bonds. Most offer semi-annual or monthly income to the investors. The investors ultimately collect the interest and principle payments of the homeowners. Ultimately, the investors own the mortgages.
The final party in this arrangement is the loan servicing company. The loan aggregator is responsible for appointing the servicing company. The loan servicing company acts much like a property manager for an apartment building. The servicing company communicates with the borrower, collects payments from the borrower, pays the property taxes and insurance if an escrow is involved, provides customer service to the borrower, calls a default for non-payment, forecloses on mortgages, and modifies mortgage terms within parameters outlined by the owners/investors.
Because of the complexity of mortgage loans, homeowners often do not recognize the plaintiff should a foreclosure case be filed against them. If you are facing foreclosure, you should take action. You need an attorney to help you sort through your options and choose the best remedy. Never hire a firm to help you with your foreclosure unless the firm is experienced in helping homeowners with all the possible remedies, loan modification, short-sales, deed-in-lieu, consent foreclosures, and bankruptcy. Before you do anything, you should give me a call. We can discuss all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.