Who Owns Your Loan if It Is Securitized?

by Steve Lander
You might never figure out who owns your mortgage.

When someone refers to a mortgage as being securitized, he isn't saying that it's safe. A loan that is securitized has been turned into a security that can be traded on financial markets. Once the loan gets securitized, it can be very hard to tell who actually owns it since it frequently gets wrapped up in a web of banks, mortgage servicers, and derivative securities.

Why Securitization?

Research conducted by the Federal Reserve Bank of New York shows that traditional 30-year fixed rate mortgages are more likely to be securitized. From a bank's perspective, a 30-year loan isn't a very good deal. Its money gets tied up with you for 30 years and it can't even increase your rate if the market changes and interest rates go up. Furthermore, if interest rates go down, you can prepay the loan and give it back its money, which it will have to re-lend at a lower rate. Securitizing your loan lets the bank give all of those risks to someone else while giving it back its money to lend out again. Since many securitized loans are guaranteed by Fannie Mae, Freddie Mac and other institutions that are backed by the U.S. government, they're pretty good places for investors to park their money, even given the prepayment and interest rate risks, since they're perceived to be very safe.

How Securitization Works

Your mortgage usually starts out with a bank or other traditional lender, just like a non-securitized mortgage. After a little while, the lender sells your loan to a third party, which is usually a government-sponsored entity like Ginnie Mae, Fannie Mae or Freddie Mac. The owner of the loan bundles a few or a few thousand of them into a pool and then sells securities that have rights to the cash flow from the pool. These basic mortgage-backed securities are called pass-throughs, since the payments pass-through to the investors. When you pay your mortgage, your money goes to a company called a servicer that collects the money and handles the mortgage paperwork, then bundles your payments with the other payments from the pool and sends each investor his share of it.

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More Complicated MBS

Your mortgage might not be in a pass-through pool, though. It might be packed into a more complicated security called a Collateralized Mortgage Obligation. CMOs take existing loans or pass-through bonds and split them into portions called tranches. Each tranche can have different characteristics. The top tranche, for example, frequently gets paid first, so it's less likely to be affected by prepayments or by foreclosures than the bottom tranche. Since it's safer, the top tranche is frequently more expensive to buy, while the lower tranches are cheaper and offer more risk and more return. CMOs can even separate interest and principal payments, too.

So, Who Owns It?

If your loan ends up in a pass-through pool, it's owned by everyone who owns a piece of the bond. So, for example, you might be making your monthly payments to a wealthy individual in Switzerland, a teacher's pension fund in Florida and to yourself through a bond fund that you own in your 401(k). If your mortgage is in a CMO, it gets even more complicated. Your interest may be going to the three people above while your principal payments get split between, say, a retiree in New York and a hedge fund in San Francisco.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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