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So why, then, has the mortgage industry been so slow off the block in working out deals with the borrowers facing resets and foreclosure?
Because the structure of the modern mortgage industry, which has sliced and diced each part of the mortgage process and then farmed out each of those slices to separate companies, has destroyed much of the incentive to work out solutions with mortgage borrowers.
Here's how it works
Think about the life history of the average mortgage.- Some company originates it. That could be a mortgage broker, who qualifies a potential borrower and then puts that borrower together with a mortgage lender, or it could be a mortgage lender itself that also serves as the originator.
- That mortgage is usually then sold to another mortgage company, to a quasi-governmental entity like Freddie Mac (FRE, news, msgs) or to an investment bank.
- After purchase, those mortgages are most commonly bundled into securities, called residential-mortgage-backed securities, that are then sold to investors such as insurance companies and pension funds.
- Even that's not the end of the road for many mortgages because many residential-mortgage-backed securities, a bundle of, say, 1,000 or more mortgages, are then themselves bundled and then re-sliced into pieces of varying risk. These are then sold as collateralized debt obligations (CDOs) that might own as many as 100 residential-mortgage-backed securities, or 100,000 mortgages.
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- There are even CDOs made up of CDOs that might own as many as 10 million mortgages.
- A separate part of the mortgage industry, the mortgage service companies, collect payments from mortgage borrowers and then make sure that the right number of dollars gets to the right party.
So who has an incentive to work out a deal with that mortgage borrower before he or she gets into trouble? Not the mortgage service company. These companies operate on the slimmest of margins, and any mortgage that requires extra work eats into that profit. Not the mortgage broker, certainly. Many brokers have gone out of business in the housing slump. Those that haven't, having already been paid for originating the mortgage, have no incentive to help with any debt workout.
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Jubak’s Journal: Fallout of foreclosuresWhat happens when someone goes into default and then forecloses on a home mortgage? MSN Money's Jim Jubak details three scenarios and provides tips for investors looking at debt instruments.
That leaves the mortgage lenders. And here's where it all gets very ugly.
Oh, that fine print
Typically when a mortgage lender sold its loans to investors, the deal came with fine print that discussed the mortgage lender's obligations to buy back the loans from investors. For example, the $122 billion in mortgages sold by Countrywide Financial (CFC, news, msgs) from 2004 to 2007 often included a buyback provision that would be triggered if the terms of the mortgages purchased by investors were changed to help borrowers remain current.The decision on when to change the terms of a mortgage to help borrowers remain current is left to the mortgage service company. In this case, that's usually the home-loan servicing unit of Countrywide Financial itself.
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