You probably have heard the good news.
California is set to be hit hard by foreclosures. It already is being hit hard. That's not the good news (unless you are a Repo Man).
Last week, Gov. Arnold Schwarzenegger announced he had struck a deal with four subprime lenders. While you've heard of the first two, Countrywide and GMAC, they are originators of some subprime loans. The other two might need a little introduction, Litton and HomeEq. Litton and HomeEq are both Subprime Servicing Companies. Combined, these four service nearly one quarter of all subprime loans in California.
SERVICERS ARE DIFFERENT
Although they lend some money, their primary function is NOT originating loans. They are not Lenders. They make money by sending out the bills, collecting the payments and if need be calling the borrowers to see when they might be making their payments.
LENDING VS. SERVICING
When you applied for a loan there was a form that explains that while ABC Bank might lend you the money, they can and probably will sell your Note in the future to someone else while continuing to service your loan. You remember that form, right?
The other two companies, Countrywide or GMAC are not in the business of holding mortgage paper either. Most every loan they can sell - they will. In this way they have more money available to lend the next person. That's a good thing. We want them to have money available to lend.
THE DEVIL IS IN THE DETAILS
Here's where I have a problem with Arnold's deal. He's not talking to the right people. Chances are that these guys don't own the loan anymore. To modify or change the terms of the loans the Owner of the Note will have to agree to the new terms. But who is that new owner? If the loan has been securitized it might not be a single entity but a myriad of tranches that own the loan.
Back in July I found a great explanation as to how these loans are sold and divided. Watch this video by CNBC. Halfway through Steve says, "Jane is actually in all 5 pieces here".
So Jane's loan is owned in part by 5 different hedge funds or investors.
Part Two tomorrow...
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Mike,
Thats the problem, they are all Servicers now. People tend to think that when a Loan is Sold, it goes right to a bank, Obviously not the case here.
More Great Info
This might sound totally naive and I don't live in CA but I thought Arnold was doing a good job and he seemed informed....wouldn't he know who to talk to? If you think he's talking to the wrong people, why would he do that?
Looking forward to part 2!
Great post, Mike. Securitization has been a big part of the growth in our economy over the last 20 years. This isn't just in real estate, they've also securitized car loans and credit cards and virtually every other form of debt. Now, as it starts to unwind, this will make it harder, and in some cases impossible to step in and do a work out before it is too late.
Tom - You know it. Servicers of loans cannot make modifications of loans unless all parties agree. How do you track down each individual owner of the loan when it's been securitized and split into various tranches?
Jason - I've already written it. But you'll have to wait. (it made for too long of a post)
Krista - Arnold might be doing a good job but he's also a politician. Barney Franks is a politician. He's doing a good job too. The question isn't how do you best fix the industry... I believe that somewhere, someone with the inside knowledge has tried to tell these guys the truth. I'll be bold enough to say that the truth isn't important or as important as the perception of the truth.
Lisa - Thanks. my comment above applies to your point as well.
Peter - Let's make securitization illeagal. Then only outlaws will have securitization. - oh never mind. (just kidding) LOL Good Point! Without the process of securitization everything would be more expensive. How would the consumer like them apples?
Michael - Thanks for the kind words. Obviously you are a man of discriminating tatse. (all us Michaels are)
Fran you are welcome!
Interestingly, this post was also picked up by Reuters