The Truth About Securitized Mortgages

The majority of mortgages in the United States are sold into securitized trusts called REMICS and are not held as in-house or “portfolio” loans. All sub-prime loans are sold off in this way and have been since the late 1960s. The practice became especially common in the 1990s when the writing of sub-prime loans became more prevalent. Many prime loans also wind up sold as mortgage-backed securities.

REMIC is short for Real Estate Mortgage Investment Conduit. They are investment vehicles which hold commercial and residential mortgages in trusts and then issue securities representing an undivided interest in these mortgages. Investors, such as insurance companies, pension funds, and wealthy private investors, buy these mortgage-backed securities. The securities are assembled into pools called tranches according to their level of risk. Higher risk mortgage-backed securities command higher rates of return. REMICs are managed by a trustee, often a large investment bank, and are governed by pooling and servicing agreements (PSAs).

Often the note that is supposed to back the security never makes it into the securitized trust, or arrives after the date set for completion of the sale of the REMIC as set forth in the PSA. Clear violations of the PSA could cause the trustee to be fined, to lose special tax status, or to be sued by investors.

In many cases the PSA does not allow substitution of a performing loan with a non-performing one, and yet that is exactly what happens when foreclosure judges enter orders and judgments against loans in the pool. The anonymous investor or investors, who are never named as parties in the foreclosure suit, are left holding the bag for defaulted loans within the pool.

The trustees, on the other hand, have been paid many times over. Each note can be resold in the form of a security inside the mortgage-backed trust as many as 30 times. If the mortgage has defaulted (90 days delinquent or more) the government backing from Fannie Mae, Freddie Mac or FHA, or private mortgage insurance, will have paid back the full value of the loan, even if it has been paid down substantially by the homeowner.

The homeowner in default has absolutely no awareness most of the time that the holder of the note has been paid off already and yet the lender/”pretender lender” is also suing for the home and possibly for a deficiency judgment after the homeowner goes into default. The homeowner probably has never received notice that the note was quite possibly sold even before the loan was underwritten by investors of a mortgage-backed security. (The investors probably also don’t realize that they bought a note even before it was underwritten, an action that was quite possibly counter to the rules of the PSA.)

From the homeowner’s perspective the one they owe the loan to is the lender who presented them the mortgage papers, and yet very frequently that bank was just a “pretender lender” for the mortgage-backed security trustee ensconced in some Wall Street investment bank and their anonymous investors. As securitization expert and attorney Neil Garfield says, “This is a classic case of necessary and indispensable parties being ignored.”

Most securitized loans offer a raft of opportunities to find fault with the original lending process, the foreclosure process, or both. An experienced attorney with training in securitization and forensic mortgage audits can uncover many ethical and legal violations to help homeowners to get out from under these loans.

Just in the examples given here there may well be violations of the pooling and servicing agreement that in effect could endanger the trust’s status. If a “pretender lender” is the one filing a foreclosure notice that notice may be null and void because the party named as plaintiff really isn’t the one who is the rightful owner of the note. Finally, the homeowner needs to know who actually holds the loan, and that is, quite frankly, rarely revealed when the loan has been securitized. All are issues that can be used as leverage against a lender on behalf of a distressed homeowner.

To get more information about investors can use this information to help underwater homeowners and do some great deals in the process, give my office a call at 706-485-0162. All of this shady stuff the banks have been doing has created the most incredible opportunity I have ever seen in real estate investment. We finally have what we need to get the banks working on our terms. Again, for more information, call me at 706-485-0162.