Last week I got a call from a real estate advisor who wanted help working out a troubled mortgage. I asked him whether the mortgage was” securitized”? Right away he assumed that I knew nothing about mortgages, because he said, “of course it’s securitized, I’ve already said we need help with a mortgage”. Clearly he thought that since a mortgage is involved, the loan is “securitized”. Because the distinction means everything, those two concepts are worth discussing.
Any loan that is secured is “collateralized.” That is to say, the lender has some sort of collateral. If the loan is not repaid, a specific asset owned by the debtor stands as security for the debt. The collateral may be real estate, which is represented by a mortgage. But it may be a car, where the security interest is recorded on the title, or even personal property that is actually kept by the lender until the loan is repaid, such as a short term loan from a pawn shop. All these loans are collateralized. Typically there are two parties, the debtor, and the lender, also sometimes called the “secured party”. In the event of default, most debtors try to protect the collateral, which might mean they get the money together to repay the Lender, or they rework the debt. Sometimes they surrender the security and figure out whether there is a debt left over after the collateral is given back to the lender.
Those loans are collateralized, but they are not securitized. A real estate loan is securitized when its mortgage is grouped together with other loans and sold as a bundle to investors. Those investors do not buy the mortgage. They buy a certificate that represents the investor’s right to be repaid. The mortgage is transferred to a trust that is managed by a servicing agent. That bundle of mortgages is synthesized by an extremely convoluted process. The mortgages will never again have the same characteristics any one of them had when the process began because, even though a specific mortgage may be pulled out of the bundle, the parties who have interests in repayment of that mortgage are quite different, and the agreements that bind those parties are so complicated that changing the amount due or the terms of repayment is unlikely. Short sales of securitized mortgages have become more frequent than several years ago, but workout of the loan so an owner can stay in his house and be forgiven part of the debt is rare.
(Almost all residential loans made after about the year 2000 are securitized. Most commercial loans are not.)
Without giving away the plot, in Gravity, Sandra Bullock sought to propel herself 350 miles through space to a Chinese spacecraft. The rest of us have about as much chance of working out a securitized loan for a client as Sandra finding that Chinese ship in outer space. Until the federal government prescribes a uniform process for securitization, and for retracing the steps when a mortgage goes astray, my money will stay on Sandra Bullock finding the spacecraft.
A loan that is simply collateralized should be worked out with the lender, one way or the other. Generally it can be, because both parties can be predicted to look out for their own best interests, and those are obvious. But where a mortgage has been securitized, your lawyer’s most obvious quality should be a weary fear of the inevitable. If he charges you for the wine he drinks, you’ll need another loan.