The Securitization of Mortgages and Why Does it Matter to You

It used to be that when a person took out a mortgage, it was with their local bank.  The bank funded the mortgage (although with money created from thin air – but that’s another story).  The bank held the mortgage and note (the note is the promise to pay and the mortgage is the instrument that pledges the house as collateral for the note) and the person made their payments to the bank.  There was a connection and usually a relationship between the person making the payments and the financial institution receiving the payments.

All of that changed with the advent of securitization in the 1990s.  Through the process of securitization, banks could move mortgage loans off their books so they could make more mortgage loans and make huge fees doing so.

Wall Street came up with the idea of buying mortgages and notes, bundling them by the thousands into Special Purpose Financing Vehicles known as Collateralized Debt Obligations from which they could sell bonds to big time investors such as pension plans and make a lot of money doing so.  These bonds are known as Mortgage Backed Securities – thus the description of the process is called securitization.


 

Our purpose here is not to explain the process of securitization except in a general way.  The securitization of mortgages is very complex and made so deliberately by its creators in order to better justify and camouflage the massive amounts of money being made by the folks on Wall Street behind mortgage securitization.

A real estate purchase or refinance loan has two main components:  the note and the mortgage.  Again, the note is the promise to pay and the mortgage is the instrument that pledges the house as collateral for the note.  In the securitization process, these two components have been separated in such a way that the bank that most people think of as their “lender” (where they make their payments) is not the true lender at all and in most cases, does not have the legal right to foreclose on the property that is mortgaged.

Let’s talk briefly about these two components and the reality of the situation with most home loans in the United States today.

The ORIGINAL NOTE is VERY IMPORTANT.  It is a negotiable instrument.  Laws in all 50 states require that the mortgage holder be in possession of the ORIGINAL NOTE to foreclose on a mortgaged property.  A copy is INSUFFICIENT.  Just try making a copy of a $100 bill and see if you can spend it.  Not only can you not spend it, you might find yourself in jail for counterfeiting!

While the ORIGINAL NOTE is very important, the truth is that in most cases today, the ORIGNAL NOTE has either been lost or destroyed.  This has to do with carelessness or outright fraud on the part of the financial institutions.  Yet only the holder of the ORIGINAL NOTE has the legal right to foreclose as it alone is the Real Part in Interest.

Remember that in the securitization process, the note and mortgage have been separated.  The notes were sold to Wall Street banks which pooled these notes by the thousands into Special Purpose Entities known as Mortgage Backed Securities for which bonds were sold to large institutional investors.  In this process, the notes were sliced and diced with different parts going into different entities.  The character of the notes has been fundamentally changed and the notes, in effect, no longer exist as separate notes.  It’s like taking a bunch of apples and putting them into a blender together to make apple juice.  The fundamental nature and character of the apple has been changed and CANNOT BE RESTORED.  While you can make apple juice from apples, you cannot make apples from apple juice.

This securitization process was very profitable for the Wall Street banks.  In many cases, especially for sub-prime loans, bonds could be sold on a loan which were double or even triple the face value of the loan.  In other words, a $150,000 sub-prime loan might bring in $300,000 to $450,000 or more!  Are you beginning to get a picture of the vast amounts of money being made by these Wall Street banks through mortgage securitization.  And this doesn’t even include the fee income!

Now in their rush to make all this money, the rules were not followed, federal lending laws were violated, and the original notes were usually lost or destroyed. 

Which brings us to the second component of the loan – the mortgage.  The mortgage company is virtually always a servicing company ONLY and not the holder of the ORIGINAL NOTE.  Now if the mortgage company is a credit union or small local bank, it’s very possible that they are the note holders.  However, if the mortgage company is either a mortgage company or large banking institution, they are rarely the note holder as their standard operating procedure in real estate loans from 2000 to 2009 was securitization.

To find out if your bank still carries the note, call our office for a FREE mortgage audit. Here's our number: 1-877-9KEEPHOME. Or if you want us to call you, put your information here.