It used to be that homeowners went to their local banker to borrow funds to purchase a new home. The local banker usually knew the home buyer as well as the property and its value. If the homeowner later encountered trouble making timely payments, he or she would go back to the bank which held their mortgage, meet with their banker, and together they would try to work out a solution acceptable to both sides to forestall a possible foreclosure.
Now, however, it is not unusual for a home buyer to use the internet or a mortgage broker to find a lender for them with whom they have had no prior contact. And thus begins a confusing journey for a homeowner who may someday be in financial distress and need to find the ultimate holder of their mortgage.
In recent years a process called “securitization” has made mortgages much more easily available to home buyers. At the same time, this process has made it much more difficult for a borrower to locate the ultimate holder of their mortgage with authority to modify the terms of their loan.
The process begins when a borrower goes to a mortgage broker or lender who originates their loan. The loan is then assigned to a servicing company which collects the homeowner’s mortgage payments which are available for distribution to investors. A Wall Street investment bank then gathers thousands of these loans and packages them together to create mortgage-backed securities which generate an income stream from the loan payments to be distributed to investors. The securities are in the form of investment trusts. Once these loans are gathered and placed in a trust, the trust issues bonds which are sold to investors. A trustee bank oversees the trust, including the servicers of the loans, on behalf of investors. At each stage – the gathering of loans into a trust, the servicing of loans, there are agreements setting forth the responsibilities of the overseeing party. This agreement binds the servicer of the mortgage and controls what a servicer can do to assist borrowers who are behind in their loan payments. Because the borrower makes their mortgage payments to the servicer, the servicer is their primary contact in this process.
It is the limitations which are frequently imposed on a servicer to modify existing loans in a trust which have been creating difficulties for buyers in distress who are attempting to resolve their problems with their lender prior to a foreclosure action being instituted. Such borrowers are finding it increasingly difficult to find a party who has the authority to make substantive modifications to their mortgages to alleviate or “work out” a borrower’s immediate financial problems.
The extent to which mortgages are now securitized (60% of the home mortgages made in the U.S. in 2006 went into securitized trusts) has added to the difficulties the mortgage industry is currently facing. Often, there is no easy way to find a responsible party who can help a borrower find a solution when a borrower is facing financial distress, leaving the commencement of a foreclosure action more likely.