If you get far enough behind in your mortgage payments, you'll probably find yourself facing a foreclosure. You'll receive a complaint, the first step in a judicial foreclosure, or another document, like a notice of default in a nonjudicial foreclosure, letting you know that the process has started.
In that initial document, you might notice that the foreclosing party is something like "U.S. Bank National Association, as trustee, on behalf of the holders of the Bear Stearns Asset-Backed Securities I Trust 2009-AC6." If you see this kind of language in your foreclosure paperwork, your home loan is part of a residential mortgage-backed security.
But what is a mortgage-backed security? In the most basic terms, a mortgage-backed security is a type of investment that's secured by home loans.
When you take out a loan to buy a home, the lender provides you with money to make the purchase in exchange for your promise to repay the loan plus interest. This promise, along with the terms for repayment, is contained in the promissory note. As part of the transaction, you'll also pledge the home as collateral for the loan. The mortgage (or deed of trust) is the document that contains this pledge.
In a process called "securitization," multiple loans, including both the promissory note and the mortgage or deed of trust, with similar characteristics are pooled, often held in a trust, and then sold in the secondary market. The purchaser (or "investor") gets the right to receive a portion of the future income stream that comes from the borrowers' payments on the mortgage loans.
The key parties in the securitization process are:
A "pooling and servicing agreement" (PSA) is the main contract that governs the relationship between the parties in the securitization process and controls what can and can't be done with a securitized trust. The PSA lays out the rights and obligations of specific parties over a pool (group) of securitized mortgage loans.
The PSA will say, among other things:
For instance, the PSA might describe the servicer's compensation. Often, a servicer is entitled to retain the late charges, nonsufficient funds (NSF) fees, reconveyance fees, assumption fees, and other fees it collects.
When a loan servicer denies a request for a loan modification or another loss mitigation option based on "investor guidelines," the servicer might be referring to the PSA. The PSA likely carefully describes the loan servicer's responsibilities for collecting payments, handling loss mitigation (including the authority to modify loans), and foreclosure.
If you think you were wrongfully denied a loss mitigation option, ask your foreclosure lawyer to get a copy of the PSA and review it for these guidelines. Your lawyer should also know how to read loan servicing communication logs and payment histories. These documents contain information about how and when the servicer reviewed your loss mitigation application.
If the securitization is public, the PSA will be filed with the Securities and Exchange Commission (SEC). You can usually find a copy on EDGAR (Electronic Data Gathering, Analysis, and Retrieval) at www.sec.gov.
Again, the foreclosure might be filed in the name of the securitized trust. For example, say you're facing a judicial foreclosure, and the plaintiff in the lawsuit is "Ameriquest Mortgage Securities Inc. Asset-Backed Pass-Through Certificates, Series 2004-R10." One way to find the PSA is to take the following steps:
However, not all trusts are listed with the SEC, so you might be unable to find the PSA related to your loan using this method. In that case, you might try making a qualified written request to get a copy of the PSA. Or your attorney may request a copy of the PSA as part of discovery if you fight the foreclosure in court.
PSAs are very complicated and can be hundreds of pages long. If your loan has been securitized and you're facing a foreclosure or were denied a loan modification, talk to a lawyer to get information about how the PSA might apply to your case.
With securitization, mortgage investors can better understand the price and risk of their investment because approved credit rating agencies classify the various tranches according to their relative risks. (Mortgage-backed securities are normally set up in multiple "tranches" based on the riskiness of the investment. A "tranche" is a portion of a pooled collection of securities that's categorized by risk or other characteristics so that it's marketable to different investors.)
High-rated tranches are made up of less-risky loans. Low-rated tranches, which are generally made up of subprime loans, carry higher risk. Standardized underwriting requirements for different kinds of loans help agencies assign ratings.
Individual mortgages, on the other hand, are often difficult for investors to understand and price. And, when investing in mortgage-backed securities, an investor is insulated from the risk of an individual mortgage default.
Any type of mortgage loan can be securitized. During the housing boom of the early 2000s, subprime loans were particularly popular for securitization because they generated large returns for investors due to their high-risk nature.
The subsequent foreclosure crisis was due in significant part to residential mortgage-backed securities that were filled with subprime loans, which eventually had massive numbers of defaults. Droves of loan defaults in low-rated tranches, as well as in more highly-rated tranches, led to large losses for investors.
The securitization process is complicated. If you're facing a foreclosure and your loan has been securitized, consider talking to an attorney to help you understand the intricacies and issues surrounding securitization as it pertains to your individual situation.
A foreclosure attorney can also explain different options that might be available to prevent a foreclosure and can tell you if you have any defenses to the foreclosure, such as the foreclosing party doesn't have standing.