Post by unlawflcombatnt on Aug 7, 2007 3:05:18 GMT -6
Below are excerpts from an article by Gretchen Morgenson discussing how the complex maze of mortgage origination and re-sale into securities is exacerbating the increased rate of foreclosures. The title of the article is
Mortgage Maze May Increase Foreclosures
By GRETCHEN MORGENSON
8/6/07
"In 2003, Dianne Brimmage refinanced the mortgage on her home in Alton, Ill., to consolidate her car and medical bills. Now, struggling with a much higher interest rate and in foreclosure, she wants to modify the terms of the loan.
Lenders have often agreed to such steps in the past because it was in everyone’s interest to avoid foreclosure costs and possibly greater losses. But that was back when local banks held the loans and the bankers knew the homeowners, as well as the value of the properties.
Ms. Brimmage got her loan through a mortgage broker, just the first link in a financial merry-go-round. The mortgage itself was pooled with others and sold to investors — insurance companies, mutual funds and pension funds. A different company processes her loan payments. Yet another company represents the investors as the trustee.
She has gotten nowhere with any of the parties, despite her lawyer’s belief that fraud was involved in the mortgage. Like many other Americans, Ms. Brimmage is a homeowner stuck in foreclosure limbo, at risk of losing the home she has lived in since 1998.
As the housing market weakens and interest rates on adjustable mortgages rise, more and more borrowers are falling behind. Almost 14 percent of subprime borrowers were delinquent in the first quarter of 2007. Investors, fearful that these problems will hurt the overall economy, have retreated from the stock and bond markets, creating major sell-offs.
And the very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers. As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools.
This impasse could exacerbate the housing slump, pushing more homeowners into foreclosure. That would lead to a bigger glut of properties for sale, depressing home prices further.
“Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,” Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. “The thing that caused the problem is making it harder to solve the problem.”....
Some homeowners have problems simply identifying who holds their mortgages. Others find the companies that handle their loan payments, known as servicers, are unresponsive, partly because modifying loans cuts into profits....
“I don’t think there is anything in the entire securitization process that is at all focused on the borrower’s interest,” said Kirsten Keefe, executive director of Americans for Fairness in Lending. “Everything they do is, ‘How are we going to make a profit, and how are we going to secure ourselves against risk?’ ”
The idea of pooling loans and selling them to investors dates back to 1970, but the practice has exploded in recent years. At the end of last year, $6.5 trillion of securitized mortgage debt was outstanding....
Fifteen years ago, the last time the housing market ran into stiff trouble, government-sponsored enterprises like Fannie Mae did most of the work pooling and selling mortgage securities. These enterprises readily agree to loan modifications.
But not so in the private issues pooled and sold by Wall Street, which has fueled the extraordinary growth in the market.
The process begins with the entity that originates the loan, either a mortgage broker or lender. The loan is assigned to a company that will service it — collecting borrowers’ payments and distributing them to investors. Sometimes the servicer is affiliated with the lender, creating potential conflicts if a loan goes bad.
A Wall Street firm then pools thousands of loans to be sold to investors who want a steady stream of cash from loan payments. The underwriters separate them into segments based on risk.
Once a trust is sold, a trustee bank oversees its operations on behalf of investors. The trustee makes sure that the terms of the pooling and servicing agreement are met; this document determines what a servicer can do to help distressed borrowers.
The agreements require that any modifications to loans in or near default should be “in the best interests” of those who hold the securities.
But there is wide variation in how many loans can be modified. Some trusts have few curbs; others allow no more than 5 percent of mortgages to be changed...."
The full article can be found at
Mortgage Maze May Increase Foreclosures
Mortgage Maze May Increase Foreclosures
By GRETCHEN MORGENSON
8/6/07
"In 2003, Dianne Brimmage refinanced the mortgage on her home in Alton, Ill., to consolidate her car and medical bills. Now, struggling with a much higher interest rate and in foreclosure, she wants to modify the terms of the loan.
Lenders have often agreed to such steps in the past because it was in everyone’s interest to avoid foreclosure costs and possibly greater losses. But that was back when local banks held the loans and the bankers knew the homeowners, as well as the value of the properties.
Ms. Brimmage got her loan through a mortgage broker, just the first link in a financial merry-go-round. The mortgage itself was pooled with others and sold to investors — insurance companies, mutual funds and pension funds. A different company processes her loan payments. Yet another company represents the investors as the trustee.
She has gotten nowhere with any of the parties, despite her lawyer’s belief that fraud was involved in the mortgage. Like many other Americans, Ms. Brimmage is a homeowner stuck in foreclosure limbo, at risk of losing the home she has lived in since 1998.
As the housing market weakens and interest rates on adjustable mortgages rise, more and more borrowers are falling behind. Almost 14 percent of subprime borrowers were delinquent in the first quarter of 2007. Investors, fearful that these problems will hurt the overall economy, have retreated from the stock and bond markets, creating major sell-offs.
And the very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers. As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools.
This impasse could exacerbate the housing slump, pushing more homeowners into foreclosure. That would lead to a bigger glut of properties for sale, depressing home prices further.
“Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,” Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. “The thing that caused the problem is making it harder to solve the problem.”....
Some homeowners have problems simply identifying who holds their mortgages. Others find the companies that handle their loan payments, known as servicers, are unresponsive, partly because modifying loans cuts into profits....
“I don’t think there is anything in the entire securitization process that is at all focused on the borrower’s interest,” said Kirsten Keefe, executive director of Americans for Fairness in Lending. “Everything they do is, ‘How are we going to make a profit, and how are we going to secure ourselves against risk?’ ”
The idea of pooling loans and selling them to investors dates back to 1970, but the practice has exploded in recent years. At the end of last year, $6.5 trillion of securitized mortgage debt was outstanding....
Fifteen years ago, the last time the housing market ran into stiff trouble, government-sponsored enterprises like Fannie Mae did most of the work pooling and selling mortgage securities. These enterprises readily agree to loan modifications.
But not so in the private issues pooled and sold by Wall Street, which has fueled the extraordinary growth in the market.
The process begins with the entity that originates the loan, either a mortgage broker or lender. The loan is assigned to a company that will service it — collecting borrowers’ payments and distributing them to investors. Sometimes the servicer is affiliated with the lender, creating potential conflicts if a loan goes bad.
A Wall Street firm then pools thousands of loans to be sold to investors who want a steady stream of cash from loan payments. The underwriters separate them into segments based on risk.
Once a trust is sold, a trustee bank oversees its operations on behalf of investors. The trustee makes sure that the terms of the pooling and servicing agreement are met; this document determines what a servicer can do to help distressed borrowers.
The agreements require that any modifications to loans in or near default should be “in the best interests” of those who hold the securities.
But there is wide variation in how many loans can be modified. Some trusts have few curbs; others allow no more than 5 percent of mortgages to be changed...."
The full article can be found at
Mortgage Maze May Increase Foreclosures