Mortgage Securitization: What Was Supposed to Happen

Step 1: Originator makes loan to homebuyer, gets Note and Mortgage; In NJ, the Mortgage is lien on the property and represents collateral and claim to title; originator may be financed by warehouse liquidity bank or LOC home buyer
Note and Mortgage

Loan $

originator

warehouse liquidity bank

Pre-1990s, the originator would have been a local bank who kept the mortgage in house for the life of the loan.

The Note and Mortgage would have been duly filed with county clerk or registrar as evidence of a lien on the property
In NJ, the Deed might remain with the homebuyer

Mortgage Securitization: What Was Supposed to Happen

home buyer
Note and Mortgage

Loan $ Note and Mortgage Note and Mortgage Note and Mortgage

originator
Sale $ warehouse liquidity bank

sponsor
Sale $

depositor
Sale $

MBS trust

Step 2: MBS pool Sponsor buys loans from Originators and re-sells loan package to Depositor, who places loans in issuing Trust; Note and Mortgage assigned at each step. Qualifying loans typically had to be placed in the Trust within a 90 day window.

Mortgage Securitization: What Was Supposed to Happen

home buyer
Note and Mortgage rating agency; bond insurer; credit default swap Note and Mortgage Note and Mortgage

Loan $ Note and Mortgage

originator
Sale $ warehouse liquidity bank

sponsor
Sale $

depositor
Sale $

MBS trust
Bond

Investment $

investor

Step 3: MBS Trust obtains ratings, issues bonds to institutional investors

Mortgage Securitization: What Really Happened

home buyer
Note and Mortgage rating agency; bond insurer; credit default swap

Loan $

originator

sponsor

depositor

MBS trust
Bond

warehouse liquidity bank

Investment $

investor 1. 2. 3. 4. 5. 6. Mortgage separated from Note; never assigned so no chain of title to MBS trust Assignments recorded with MERS, if at all, and not with County Clerk or Registrar Sponsor and Depositor were dummy entities with no assets, so no true sale occurred Loans upstreamed to MBS Trust directly from originator in some cases MBS Trust has no legal interest in the property Warehouse bank may be true lender

And Theres More

Mortgage P&I

Mortgage P&I

home buyer
Title?

loan servicer
Title?

The loan originator, and the pool sponsor and depositor are long gone. The MBS Trust hires a loan servicer to process homebuyer payments and manage the loans via a Pooling and Servicing Agreement. The servicer has no ownership interest in the property and cannot foreclose.

MBS trust
Bond P&I

investor