By Marc Dann, Attorney at Law
Homeowners and investors in mortgage backed securities and mortgage servicing companies need to be wary of a new development in the mortgage meltdown that has now plagued this nation for nearly six years. This new development comes in the wake of the 2007 mortgage crisis and has perpetuated risk and uncertainty for the housing market as a whole, including homeowners facing foreclosure, investors, banks, and servicers.
During the past 12 months, the rights to service millions of home loans have been shifted from large banks like Bank of America, Wells Fargo, Citigroup and Chase to specialty loan servicers like Ocwen Home Loan Servicing, Nationstar and SPS. The shift creates great risk and uncertainty for homeowners facing foreclosure, the housing market in general and for investors in mortgage backed securities and mortgage servicing companies.
This shift has great consequences for homeowners facing foreclosure, and for those who have invested in mortgage-backed securities, including U.S. taxpayers who hold the majority ownership in the two largest investment vehicles – Freddie Mac and Fannie Mae. This shift is already shaping up to undermine the unlikely mutual interest that exists between homeowners facing foreclosure and investors in bonds and other investment vehicles backed by their mortgage payments.
Modifications benefit the at-risk homeowner because he or she stays in his or her home. They benefit the investor in bonds and other investment vehicles backed by mortgage payments because the modified loan holds a much higher value than the same property liquidated through foreclosure. Therefore, with a well-reasoned modification of a home loan both the homeowner and the investor both win.
Unfortunately, because of the perverse system of compensation and incentives created during the housing boom, most loan servicers, like Ocwen and Nationstar do not have the same incentive to make sure loans are properly modified. To understand why, it is important to understand how the loan servicing relationship was initiated in most cases.
During the housing and refinancing boom that preceded the crash, there was huge demand on Wall Street for loans that could be quickly packaged and resold to investors. Aggressive mortgage originators like Countrywide Home Loans, ABM Ambro and Washington Mutual, as well as the big banks themselves had tremendous leverage with the investment banks that were packaging the pools of mortgages into bonds.
In almost all cases, the originating lender retained the right to service the loan sold …read more