Affordable Housing Institute : US

 [Continued from yesterday's Part 2 and Part 1.]

 

As we explore the business of restructuring non-performing loans (the retail end of the origination value chain), we rapidly become aware, as the New York Times sententiously advised us, that Unseen Forces Are At Work:

 

Bang the default ball into the servicer – what happens?

 

There’s a lengthy clacking linkage that goes:

 

                          

 

Loan servicing is the business of opening envelopes, capturing the checks that fall out, associating them with a particular loan, and updating the loan amount due.  (In these days of modern times, they do it with computers, but it’s fundamentally an administrative function.)  Pace the Times, the reason borrowers sometimes find servicers unresponsive is not “because modifying loans cuts into profits.”  Profitability in loan servicing is all about efficient processing.  Modifying a loan has nothing to do with the servicer’s profits — rather, paying attention cuts into the servicer’s profits, because they’re not set up for it. 

 

Loan servicing is like a call center; if your problem is genuine (and not simply because you forgot to turn on the computer), you have to get transferred from the entry point to someone higher up the organization.

 

Even if circumstances suggest fraud when a loan was made, lawyers say, the various parties protect each other by refusing to produce documents.

 

Balderdash.  “Never put down to malevolence anything that can be explained by simple oversight.” 

 

We’ve got top men working on it.  Top … men.

 

Further, every document the lawyer should be requesting was given to the borrower when her loan closed.   Responding to lawyer interrogatories (a/k/a fishing expeditions) can be explained by many things other than a defendants’ cartel.

 

We have to explore every crevasse of argument

 

Compounding the problem is a law stating that when a loan is passed to another party, that entity cannot be held liable for problems.

 

Wrong again!  The doctrine is ‘holder in due course’, meaning that if B defrauds A, who signs a note, and then B sells the note to C, then C as a ‘holder in due course’ cannot be held liable for B’s fraud, and meanwhile, nothing precludes A from suing B.

 

I was a holder in due course!

 

Further, the sentence fundamentally misunderstands the nature of securitization.  The loan has not been sold; rather, the lender has sold a security that is backed by a bundle of loans. 

 

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.

 

The loan is still intact; it’s being administered by the loan servicer on behalf of the ‘investing lender.’ 

 

More than 60% of home mortgages made in the United States in 2006 went into securitization trusts.  Some $450 billion worth of subprime mortgages, those made to borrowers with weak credit, went into securitizations last year.

 

So there is a workout counter-party — the investing lender — who can be brought to the table.

 

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.

 

That’s called securitization, and it’s exactly the same activity done by the banks.

 

These enterprises readily agree to loan modifications.

 

They do?  That’s news to me.

 

 

It’s especially ironic because Fannie Mae and Freddie Mac have been among the biggest investors in subprime lenders and buyers of subprime securities, with as much as $4.7 billion in unrealized losses.

 

But not so in the private issues pooled and sold by Wall Street, which has fueled the extraordinary growth in the market.

 

Fannie Mae and Freddie Mac do exactly the same thing as Wall Street

 

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.

 

Is the logic giving you whiplash?

 

 

Only moments ago, the Times was decrying separation between servicer and investing lender.  Now it’s decrying their affiliation. 

 

Well, who’s right here?

 

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.

 

Sherlock Holmes’ financier brother Mycroft explained it thus:

 

 

“That is a principle of securitization; each time the banker slices offer a lower tranche — as a concession to the Bourse, we have adopted their term — the remaining junior security is on the one hand higher yield, and on the other, a distilled or more concentrated residue of risk.” 

 

You want some of the equity slice?

 

“Distillation of risk — issuance of securities and holding the residual and most junior piece — requires special handling.  That in turn takes special knowledge, special expertise, and constant vigilance.”

 

Enter the bank trustee:

 

Enter, and sign in, please

 

[Concluded tomorrow in Part 4.]

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