What are Mortgage Backed Securities, and why do I need to learn all of these complicated terms just to get a loan modification?
Before the foreclosure / credit crisis, homeowners never had to concern themselves with complicated mortgage fundamentals such as mortgage backed securities, credit default swaps, and Net Present Value.
With a booming economy, low unemployment, and an abundance of home equity, very few borrowers were faced with the nightmare of navigating the foreclosure process.
Unfortunately, the Making Home Affordable Loan Modification Program is just one of the many foreclosure terms that has become the topic of everyday conversations.
Among the most frequently asked loan modification questions that we hear on a daily basis, confusion about who actually owns the mortgage note is generally at the top of the list.
It seems that most lenders would be willing to negotiate with a distressed homeowner who had a reasonable hardship and properly packaged loan modification application.
However, understanding the basics of how mortgage money is created and traded on the secondary market will help explain some of the obstacles borrowers are facing when they call the number on their mortgage payment coupon in search of help.
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What is a Mortgage Backed Security (MBS)?
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According to Wikipedia –
A mortgage-backed security (MBS) is an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property.
First, mortgage loans are purchased from banks, mortgage companies, and other originators. Then, these loans are assembled into pools. This is done by government agencies, government-sponsored enterprises, and private entities. Mortgage-backed securities represent claims on the principal and payments on the loans in the pool, through a process known as Securitization. These securities are usually sold as bonds, but financial innovation has created a variety of securities that derive their ultimate value from mortgage pools.
Translated -
A Mortgage Backed Security is piece of a large pool of mortgages that an investor can purchase in the form of a bond.
Without getting too detailed about how these bonds are given their value or credit rating, the main purpose of pooling mortgages together and re-selling them in groups is primarily to keep the originating banks liquid so that they can continue lending mortgage money to borrowers.
Basically, a homeowner goes to their bank to get a mortgage. The bank will then combine a bunch of their mortgages together and sell them to an investment bank on Wall Street. From that point, the mortgages are sliced up and sold to different types of investors based on a historic model of expected return for that particular type of loan.
Obviously, this process is too complex to articulate in a few sentences, but the main point is that one borrower’s single home loan may pass through several hands before it ends up as a small piece of another person’s investment portfolio.
So, whom am I making my mortgage payment to?
In most cases, a third-party loan servicing company handles the collection of monthly payments and distribution of principal, interest, taxes, and insurance.
The servicer will purchase the mortgage servicing rights to essentially handle the basic bill collecting duties in exchange for a small fee.
With a sudden boom in foreclosures over the past few years, servicers simply weren’t prepared, properly staffed or experienced to handle the overwhelming loan modification or foreclosure prevention requests from homeowners.
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Videos – What is a Mortgage Backed Security (MBS)?
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Related Articles
- 2008 Financial Crisis Explained For Kids
- Credit Crisis Explained
- Financial Services Modernization Act Explained
- Mortgage Backed Securities Explained
- Credit Default Swaps Explained
- Knock Knock, Who’s There? – Your Mortgage Servicer
- Should The Government Subsidize Mortgage Modifications?
- Federal Homeowner Program Making A Dent In Foreclosures
- Investor Sues To Block Loan Modifications
- What is a Mortgage Backed Security? – The Financial Instrument That Destroyed Bear Sterns
- Homeowners Seeking Government Loan Modifications Are Fed Up
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