So who are the winners: Mortgage servicers or investors?

Written by Biloxi

One of Fannie Mae and Freddie Mac's functions are to buy loans from banks and sell them to investors as securities And those securities provide guarantees to make investors whole if borrowers default on their home. Banks agree to certain loan-sale guidelines when they sell mortgages to the firms, and they are obligated to buy back loans that don't meet those guidelines. As the foreclosure have mounted and costing Fannie and Freddie as well as the banks, banks are now balking to buy back much of Fannie and Freddie's mortgage backed securities that the banks sold to them. Banks are now arguing that they weren't responsible for a default.

In the Financial Crisis Inquiry Commission report, Fannie and Freddie tried to recoup their losses by forcing banks to buy back loans that don't meet their underwriting guidelines. According to the report,Fannie and Freddie asked the banks to buy back nearly 167,000 loans valued at $34.8 billion from 2007 through Aug. 31, 2010. Fannie had received $11.8 billion, while Freddie received $9.1 billion.

Fannie and Freddie will continue to have differculty to recoup their losses from the banks because investors like Fannie and Freddie own much of mortgage loans than the banks. Years ago, borrowers would go to their local bank, apply for a loan, pay their loan to the bank and then work with the loan officer directly if they had trouble paying their mortgage. Well, those days are gone. Today, the bank that services the loan is separate from the investor holding the loan. Now, the borrowers are unable to communicate with a bank that is acting in the investor's interest. What is ignored in the media is the percentage of loans that the banks serviced and owns versus the percentage of loans owned by the investors. I decided to do some research and the findings are frightening.

In JP Morgan Chase CEO Jamie Dimon's testimony to the House Financial Services Committee in 2009, Mr. Dimon said, "Our foreclosure prevention efforts include both the $330 billion of loans that we own and the $1.1 trillion investor-owned loans that we service." Ms. Molly Sheehan, Senior Vice President, Chase Home Lending, JP Morgan Chase stated the same identical testimony as Mr. Dimon in 2009.

In addition, Citigroup CEO Vikram Pandit testified to the House Financial Services Committee in 2009 that majority of their loans are not on by Citigroup:

"To ensure that our efforts have the broadest possible impact, Citi has worked with investors and owners of more than 90 percent of the 4.3 million mortgages we service – but do not own – so that many more qualified borrowers can also benefit from this moratorium."

Also, Ms. Mary Coffin ,Executive Vice President, Wells Fargo Home Mortgage Servicing said that Wells Fargo's "servicing portfolio is predominantly held by other investors."

For the mortgage market to start functioning properly again, mortgage servicing model needs restructuring and restoring, mortgage investors will need to ensure that the servicing banks act in their interest, and banks will need to hold a greater percentage of the loans they originate and service in their own portfolio and not with the investors. Until this happens, states attorneys general, attorneys, and federal regulators must protect homeowners' interests by forcing banks to follow the foreclosure laws and abide by their agreements with the federal government. On a side note, Treasury Department has announced that they will delay report on Fannie and Freddie reform to Congress in the first half of February rather than by the end of this month as prescribed under the Dodd-Frank financial reform bill.