Who really owns your mortgage? If you are like many homeowners, your mortgage servicing may have been transferred several times. You got your mortgage through your local broker, then it was transferred to a big bank. Then it was transferred to a bank you’ve never heard of. When that bank went out of business, it was transferred back to a big bank. Does this sound familiar? If you have had your mortgage loan for more than a few years, especially if you got it prior to the financial crisis of 2007-2008, this type of journey from one loan servicer to another is common.
But banks don’t really own your mortgage. All they hold is the servicing rights. Mortgages are often bundled together and sold on the secondary market. Unless your mortgage is owned by one of the government sponsored lending entities, (Fannie Mae, Freddie Mac, FHA or VA) the true owner might be a hedge fund somewhere.
What Is a Subprime Mortgage?
Subprime lending is lending money to someone who is likely to have trouble repaying it. So, the definition of a subprime mortgage is a home loan sold to someone who is unlikely to be able to keep up with the monthly payments.
Americans’ aspiration to own their own homes combined with predatory – and at times fraudulent – practices by subprime lenders, put expensive home loans in the hands of people who would have been better off either renting or taking out smaller mortgages.
For the individual subprime lender pawning a subprime loan off to an individual or family, the financial incentives were hard to resist. The knock-on effect of those loans, both on the borrowers and on the economy at large, proved devastating.
The Subprime Mortgage Crisis Explained
Lenders sell mortgages as mortgage-backed securities. When this process functions properly, it keeps interest rates low and provides liquidity to mortgage markets. But after the subprime mortgage crisis – with a timeline that stretched from 2007-2008 – this went horribly wrong.
For a mortgage to be included in a bundled security, the actual mortgage note needs to be transferred from the lender to a custodial trust who then securitizes it as a bond. But for loans that had been transferred multiple times, it became increasingly difficult to complete the paper trail of mortgage transfers.
At the height of the crisis, mortgage lenders, especially subprime lenders, were rapidly going out of business. Mortgage documents were being lost or shredded. Investors in mortgage-backed securities were finding that they had no recourse to cash in their investment. And mortgage servicers were finding they had no recourse to collect from delinquent borrowers.
As stated by Georgetown Law professor Adam Levitin, in a 2010 congressional hearing on mortgage fraud: “If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever.”
A lawsuit settled in 2012 on behalf of the federal government against a group of banks that included JPMorgan Chase, Wells Fargo, Citi Bank, Deutsche Bank and Bank of America, alleged that mortgage documents were forged in order to begin foreclosure proceedings against delinquent borrowers. According to the lawsuit, these banks resorted to fake documents because they could not establish legal ownership of the mortgages on which they had caused to foreclose.
Should I Be Worried About My Mortgage?
The good news is that if you pay your mortgage as agreed, you will never have to worry about lenders forging your loan documents. Their only motivation to do so would be to begin foreclosure proceedings.
If you are having trouble making your mortgage payments but your loan is financed by one of the government sponsored entities, (Fannie Mae, Freddie Mac, FHA or VA) there should be no problems. If your loan is more than a few years old, and if it was originally a subprime loan or another unusual loan product, then it’s a good idea to watch things closely if it goes into foreclosure. Ask for copies of the loan documents and check signatures and dates for accuracy.
Of subprime mortgages that were bundled and sold as mortgage-backed securities, only a very small percentage actually had fraudulent documents. If your mortgage was one of these, you have a legitimate cause to fight and win against foreclosure.
Beware of Debt Settlement Fraud
There is another thing that you should be cautious of: opportunistic lawyers and debt settlement agents. Be careful about getting drawn into a class-action lawsuit. The only real winners of these are the lawyers.
In the suit referenced above against the banks, the fraud specialist who led the case, Lynn Szymoniak, was personally awarded $18 million of the $95 million settlement. It’s hard to see how such a result helps struggling homeowners.
Could This Happen Again?
President Obama is trying to return mortgage financing to the private equity market. While the kind of mortgage securitization that caused these problems has mostly ceased over the last four years, there is some concern that these same problems will occur again if this plan is put in place. Is this a legitimate fear?
One of the main subprime mortgage crisis causes was a lack of regulation and oversight in the industry. This was true both of bank underwriting standards and of the securitization process. That issue has largely been addressed.
The ratings agencies that allowed carelessly packaged securities to be sold as top-rated investments have been punished. It is unlikely that such rampant mortgage fraud will be allowed to happen again.
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