[lbo-talk] Mortgages

Michael Pollak mpollak at panix.com
Sun Feb 22 03:02:52 PST 2009


On Sat, 21 Feb 2009, Jordan Hayes wrote:


>> (The majority are owned by investors in securitized pools and wouldn't
>> be touched by this.)
>
> I see your problem: when you "buy" an MBS, you aren't actually buying
> the mortgages. An MBS is a synthetic instrument, afterall. It's like
> buying shares in a mutual fund. The mortgages get put into a trust, and
> the trustee arranges to receive the cash flows on the actual mortgages
> from the loan servicers -- which are mostly banks anyway, but also
> include pure-play servicers. The trustee refactors the incoming
> payments and payoffs according to the formula for the MBS for payment to
> the MBS shareholders. Because MBSs are "secured" there is this idea
> that in some sense the shareholders "own" the mortgages, but really they
> just have a claim on the cash flows in the trust. The mortgages in the
> pool are actually owned by the pool aggregator, though the cash flows
> have been contracted out to the MBS shareholders, so they don't actually
> appear on the originator's balance sheet.

This doesn't make sense to me yet. IIUC, it's not "some" sense in which the shareholders own the mortgages collectively, it's all relevant senses: they get the income, and they control whether any changes can be made in the mortgage terms (usually by a two-thirds vote). Claims on income and control over changes in terms seems like pretty much the entirety of ownership of a debt. The servicer doesn't own anything. The servicer is the contract employee at this point. They don't own the mortgages any more than the bookkeeper owns my apartment building.

Selling the complete set of underlying mortgages at a discount -- the key step so that they can then be refinanced and masses of them closed out -- seems to be something the servicer couldn't do without the consent of a supermajority of bondholders precisely because it would cause losses: the refinancing wouldn't be paying off the original mortgage, but rather paying off a discounted version and calling it quits. I just can't believe that's allowed by the terms of the average trust. If it is, then I admit, you're a genius and you've found the golden loophole everyone else was looking for and hasn't found. The whole restructuring pools thing would be simple if this were true.

Can you cite something in support? A case where this has happened, or the loophole clause in a representative trust agreement?

Michael



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