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What does securitization have to do with the foreclosure crisis?

  

avvo.com | December 7, 2014 

By Susan Murphy

Securitization is the process by which mortgages are purchased, bundled together, and sold as stocks which are known as Residential Mortgage Backed Securities (RMBS). HUD created the first RMBS in 1970 and they were managed first by Ginnie Mae and later by Fannie and Freddie which approved the loans for securitization and sale to investors. RMBS were a good business at first, back when only prime loans were being securitized and I remember investing in a few myself.

The growth of securitization was fueled by subprime loans which are at their essence a loan designed to fail. Subprime lending has many incarnations such as introductory teaser rates, interest-only loans, or “pick-a-pay” loans that negatively amortize if you make the minimum payment and these loans are all big money-makers for everyone but you. These loans all make money for the originators because they garner higher upfront fees from the securitized trust that buys the loan and the originator can also benefit by the inevitable foreclosure. This is a troublesome byproduct of the splitting of risk and reward.

Before the sub-prime lending boom and the concurrent boom in securitization, lenders “loaned to hold,” meaning they kept your loan in their bank portfolio, they benefitted by your payment, and they absorbed the risk of nonpayment. Before the sub-prime/ securitization boom sub-prime loans were extremely rare since sub-prime borrowers were high-risk and the lender was absorbing that risk. This is why before the sub-prime/ securitization boom, foreclosure was rare.

At first the sub-prime/ securitization boom created liquidity in the mortgage market with a flush of funds to middle-class borrowers. However the ability to sell a bad loan to a trust and keep the servicing rights without the risk of nonpayment inspired a lot of greed by mortgage originators. This is what has led to so many over-appraised properties that are now underwater. If the lender has retained servicing rights they also benefit when they get the right to foreclose.

There is no end in sight since securitization continues to split risk from reward and inspire greed by originators. This is why you will still find lenders over-appraising your property and lending you more than your home is worth. Securitization creates a perpetual motivation to ignore traditional underwriting standards and originate subprime loans that will eventually be foreclosed.

 

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CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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