How We Got Here – The Process of Securitization

 It helps to have some background into how Mortgages used to work (like for the last two hundred years).

1)      A Bank would loan a homeowner money.

2)      The homeowner would sign a  promissory note (note or IOU) promising to pay the money back and pledge or secure the note with real property (usually his home).

3)      The bank would take the original documents to the land registrar (County Recording Office) and they would make a copy of the Note and the Mortgage, and place it in the Official Records of the County, and note the Book and Page numbers of the documents.  This was done so is someone was to buy the home from the homeowner, they would know that there was a lien against the property which would have to be paid off before the buyer could get a “clear title” to the property.

4)      Now, suppose the bank for any reason wanted to transfer that Mortgage and Note to someone else?  What they would do is prepare an “Assignment of Mortgage” in essence transferring or assigning the mortgage to Bank #2, so that the Mortgage payments from the homeowner would now go to bank #2 instead of Bank #1.  They would record that Assignment of Mortgage with the County Recording Office so that the world would know that Bank #2 was the entity to deal with regarding that mortgage.

5)      Now these recordings of the Mortgages and Assignments cost money.  The county Recording Offices would usually charge anywhere from $10 to the hundreds of dollars for each recording, so it wasn’t a cheap process.  But it allowed everyone to know which parcels of land were free and clear, and which had Mortgages against them, and who owned that Mortgage.

But that all changed in the last ten years.

During that period hundreds of thousands of residential mortgages were bundled together (often in groups of about 5,000 mortgages and investors were offered the opportunity to buy shares (or a part) of each bundle.  This was called Securitization.

In essence, Wall Street figured out a way to turn a 30 year mortgage, with small monthly payments, into instant, large sums of cash.  Sometimes these were sold even before the homeowner’s signed the notes and Mortgages, and they were then sold many times over.

Now each “Bundle” of Mortgages had to be given a name like “XYZ Home Loan Trust 2007 OPT-1” The name of the bundle gives the investor certain information about the bundle.  The year usually tells us when the bundle was created.  The OPT-2 would mean that the mortgages were originally made by Option One Mortgage and the -2 would the second bundle that year.

Each bundle is strictly controlled by a Pooling and Servicing Agreement.  This is a crucial document for the bundle as it lays out the rules that the Trustee needs to live by to administer the bundle.  It must have a Cut0ff Date, which is the last date that Mortgages can be added to the bundle.  That’s the day that the Trustee has to identify all of the Mortgages that are contained in the bundle.  So how do they get there?

The bundle custodian, or the Trustee must certify that for each and every Mortgage in his bundle as of the cutoff date, he has a Note (and actual piece of paper, which is signed IOU, from the homeowner) which is endorsed in blank.  He also must have proof that the ownership of the Note has been transferred, which most often takes the form of an Assignment of Mortgage.  The Pooling and Servicing Agreements say that these Assignment of Mortgages don’t have to be in the name of the bundle custodian, but specifically state that:

“Assignments of the Mortgage Loans to the Trustee (or its nominee) will not be recorded in any jurisdiction, but will be delivered to the Trustee in recordable form, so that they can be recorded in the event recordation is necessary in connection with the servicing of a Mortgage Loan.”

Now that sort of destroys the way we kept track of these Mortgages for the last few hundreds of years, so to create some sense of normalcy, the Mortgage Companies created MERS.

MERS – Mortgage Electronic Registration Inc. – holds approximately 66 million American mortgages and is a Delaware corporation.  The way MersCorp works, is that its specified members have agreed to include the MERS corporate name on any mortgage that was executed in conjunction with any mortgage loan made by any member of MersCorp.  The members trust MERS to keep track of the Mortgages they place in MERS’ name.  Since the members make the entries into the MERS database themselves, then the process should work, right? 

What they do, instead of the original lender being named as the Mortgagee, MERS is named as the “nominee” for the lender who actually loaned the money to the borrower. In other words MERS just acts as a document custodian.

As we pointed out earlier, MERS was created solely to simplify the process of transferring mortgages by avoiding the need to re-record liens – and pay county recorder filing fees – each time a loan is assigned. Instead, the servicer records these loans only once, and MERS’ electronic system monitors transfers and facilitates the trading of notes. It has very conservatively estimated that as of February, 2010, over half of all new residential mortgage loans in the United States are registered with MERS and recorded in county recording offices in MERS’ name.

More to come on this subject….

 

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History - Or how we got here, MERS, The Players