The Mortgage Modification Myth

A previous article showed a diagram of the homogenization of a mortgage – a process called “securitization.” From the comments I received I am convinced that the subject makes most eyes glaze over with confusion, unless the look is boredom. In either event I’m convinced that though this subject is not one for the innocent, is too important to ignore.

A friend recently called for someone in his family who had lost his job but lived in a house he needed to keep. He desperately needed a mortgage modification. A temporary change of the mortgage terms was in the best interest of both the Borrower and Lender and made so much sense that it screamed to be possible. It was not. Not close. I never understood who (or what) the enemy was, so I could never explain to my friend the reason something so practical was out of the question. I made the mistake of letting this person believe that that modification was likely to happen because it made so much economic sense.

Mortgage securitization is the reason this otherwise sensible cure for a mortgage default is unlikely. Like fighting a horrible disease with the wrong medicine, trying to cure a mortgage default by changing its terms, even if the change makes sense for all sides, is not likely.

In some ways securitization is like making wheat into beer. Once a mortgage gets securitized, there is no going back. Remember the process – your residential mortgage is transferred to a trustee. The Trustee issues investment certificates to investors who will buy in million dollar blocks. These investors are the losers if your mortgage is not paid, not the bank or mortgage company where you made your mortgage.

The process is directed by a servicer. The servicer is guided in its duties by a Pooling and Servicing Agreement (PSA). That Agreement has multiple parties, and is hundreds of pages long. There are thousands of PSA’s and each is different. There is no publicly available index to determine for any specific loan which pool a loan is in. These PSA’s normally have several things in common:

  1. No workout of default on an individual loan in the pool can be considered until the owner is 3 months in default;
  2. Generally investors within the pool are affected differently by default or slow payment. Priority investors get paid first. Some Investors will not get paid at all, as defined in the PSA;
  3. Some require the investors’ consent before any alternative other than foreclosure is considered;
  4. Modification of principal is not permitted;
  5. The servicer is not required to pursue deficiency, although many do;
  6. The owner/mortgagor will never know the contents of the PSA that controls his specific loan.

I have called this process of conversion of a mortgage into an infinite number of legal relationships, the “homogenization” of a mortgage. In many ways, your wheat is now beer - your mortgage may not be gone, but it is certainly confused beyond recognition. We are still defining the rights of the parties who have interests in these residential mortgages. Again, I referred to that last month as “below the line confusion.” By “below the line” I mean all of the parties who share in the fragmentation of interests, once known simply as the “mortgagee”. For example, if before securitization of residential mortgages your mortgagee was Countrywide, after securitization your payments may still be made to Countrywide, but the real parties who own interests in that mortgage, and their legal relationships, are defined by a PSA that the property owner will likely never see.

My office has assigned a very experienced real estate closing agent to gather and study the publicly available PSA’s. She is also our short sale specialist. Short sales are working, even faster and better than ever, and generally without deficiency. We can’t always predict them or influence when they will be allowed, but our experience is that they are generally available.

Debt relief through modification of a securitized mortgage is still only a remote possibility. Short sales are much more available. When you start a short sale, the team should include a professional Realtor experienced in short sales.