One of the most devious aspects of the mortgage industry is how loans are originated, packaged into large deals, sliced up, and sold to investors around the world. All the while, the borrowers are led into believing that the company they are making payments to is the owner of the loan. Nothing could be further from the truth, and it is in the interests of homeowners to find out who really owns their mortgage, especially if they are being sued for foreclosure.



At every step in the process of originating and securitizing mortgages, the potential exists for the banks to violate any number of federal or state laws designed to protect homeowners against predatory lending. If it can be found that the bank has broken any of these consumer protection laws, its ability to proceed with a quick foreclosure is drastically diminished; in fact, it may be better for them at that point to offer a mortgage modification or other solution to avoid a lengthy, expensive legal process.

The originator, servicer, and holder of the mortgage are three entities that are vastly different from each other. While the originator approves the loan and secures the funding (from customer deposits or lines of credit through Wall Street investment firms), the mortgage servicer is the company hired to collect payments and proceed with foreclosure in the event of default. The holder of the mortgage is the eventual owner of the loan, but who this ends up being is usually quite unclear.

Especially with the large-scale securitization of the mortgage industry over the past decade, finding out who actually owns the loan paperwork can be downright impossible. In a typically confusing deal, a large pool of mortgages are originated and immediately sold to a Structured Investment Vehicle (SIV), which is created solely to hold the mortgages and act as a middleman between the servicer and end investors.

Then, the rights to income from these loans are cut up into "tranches" and the tranches are then sold to investors such as pension funds or hedge funds in the form of bonds. The right to collect the payments from the homeowners is given to the servicer, who then forwards the payments to the SIV, at which point the income is divided into the appropriate tranches and sent to investors.

But who actually owns the mortgages that the SIVs hold? Because unless the owner of the loan forecloses on the house once the payments are in default, the company suing the homeowners may have no legal ground to stand on. People can not be sued for defaulting on a debt by just anyone -- they only entity that can sue is the one who owns the loan (on its own or through attorneys). When mortgages are sliced up and held in specialized vehicles that do nothing except act as a conduit between the servicing company and the investors, ownership of the loan becomes a little fuzzy.

Back at the mortgage servicer, though, when properties fall behind in payments, it is the servicing company that is expected to proceed with the foreclosure. Even worse, the servicing company may only have received the rights to collect the payment and have no idea who has possession of the original loan paperwork. When they try to sue, if challenged, they may be unable to show the note. Without proving to the courts that they have the note, it is simply impossible for them to sue for foreclosure of the loan they have no ownership interest in.

Homeowners may find that they have no idea who has the right to their payments, who they can negotiate with to stop foreclosure, or who is in possession of their mortgage. Once they begin asking questions to find out this information, they may quickly realize that no one else has the answers, either. But this rarely stops the banks from pursuing foreclosure through the courts, since the banks have so many more resources than the typical borrower. Knowing that this "who owns the note" challenge can not be adequately explained, though, homeowners should begin using it more often against predatory lenders.