Foreclosure Solutions are Proving to be Difficult because of Securitization

Securitization is causing big problems and making foreclosure solutions difficult. The majority of the mortgages are not a simple contract between the borrower and the lender. The mortgages have been pooled together and sold in slices to different investors across the world. The servicers only collect the mortgage dues but they do not have the right to negotiate and alter the terms of the original mortgage. The investors are reluctant to suffer losses. This stalemate has led to the worsening of the foreclosure situation leading to lengthening of the recession.

The securitization of mortgages has been a new instrument created by the big financial houses. Specific clauses trying to protect the interests of hedge funds and or pension funds prohibit negotiation. But if the interest had been brought down and foreclosure avoided both parties – the various investors and the borrower would have benefited. The servicer remains helpless as the borrower is evicted and the investors suffer losses going through the time, money and energy consuming process of foreclosures.

Patrick Goldrick is one such victim of the faulty system of securitazation. Rose Mortgage of New Jersey granted her loan and Saxon Mortgage Services – a branch of Morgan Stanley, serviced it. When Goldrick wanted to modify the loan Saxon replied, “Your loan modification request has been denied because the investor does not allow modifications for this loan. We apologize for any inconvenience.” When pressed for comments Morgan Stanley refused to comply.

In 2005 these securitized pools seemed solid investments for those investors with fixed income. It was given a rating of AAA – a rating that is maintained even today. Fitch Ratings that does the grading said that 80% of these AAA bonds have been fully repaid. It is the lower rated pool that has not performed well. Three years after the closing of the deal, 24.3% of what was remaining in the fund is foreclosed upon and 13.1% is delinquent as in November 2008 according to the website of Morgan Stanley. The bonds of 2006 and 2006 are in great distress.

Till the time of 2007 when the foreclosure crisis hit the stage with a bang, Wall Street firms were loading their larder with mortgage-backed-securities. The front ranker was Lehman Brothers. It has collapsed since then. Bear Stearns followed suit but was saved by being purchased by Morgan Chase for peanuts. At a time there was frenetic competition to buy the bonds but the picture has totally changed with bonds going for a song.