How Does Securitization Affect Mortgage Servicing?
Mortgage securitization also affects servicing. Most mortgages are securitized, meaning the loans are sold and pooled together to create a mortgage security that is traded in the capital markets for profit. Though these securitizations can take many different forms, they are generally referred to as mortgage-backed securities, or MBS.
How are homeowners affected when their mortgages are securitized? Homeowners making timely mortgage payments don’t feel any effect if their mortgage is securitized. The homeowner just continues to make monthly payments to the servicer, although the entity servicing the loan may change when a loan is securitized.
However, for homeowners who are struggling to make payments, the issue of who owns the loan matters. As discussed in our second video, the investor—or the owner of the loan—determines which assistance options are available to struggling homeowners. And each investor has different rules. For example, the rules on Fannie Mae and Freddie Mac loans are different than the rules on loans that are securitized through Ginnie Mae. In Ginnie Mae securities, the servicer must buy the loan out of a securitization before the borrower can be offered a loan modification. This makes it harder to offer a modification with an interest rate below that prevailing in the market. In securitizations with no government involvement, the specific contracts among the parties to the securitization govern the servicer’s loss mitigation toolkit.
Before the housing crisis, loss mitigation options were harder to administer. As a result, more defaulted homeowners simply went into foreclosure. One of the legacies of the crisis has been the development of a more robust foreclosure prevention toolkit that servicers can use to help troubled homeowners stay in their homes.
By promoting a robust and effective mortgage servicing sector, we can support homeowners and create wealth-building opportunities for a wide range of Americans.
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