Me and my mortgage
10/7/2008 - 2:18pm
With the entire economic world in meltdown thanks to so-called "toxic mortgages" and exotic securitized instruments, I've been wondering about my own mortgage.
My husband and I have one of those vanilla 30-year fixed rate mortgages on our circa 1911 house in the Park Hill neighborhood in Denver. We bought the house in 2000, when it seemed there was no limit to how high housing prices would go. We refinanced twice in those early years to take advantage of interest rates that at the time were dropping.
Our mortgage has changed hands several times over the years. For the last several, I've been sending our electronic payment, month after month to Citimortgage. But it strikes me I know very little about how Citimortgage manages it. Is it possible that our loan, as safe a risk as it is, has been held in one of those pools we keep reading about-the ones that securitized instruments are based on and then traded? Was there any way I could find out?
I called the Citimortgage corporate headquarters in New York City and spoke to spokesman Mark Rogers. He obligingly did some digging for me and a few hours later told me that while Citimortgage services our loan, our mortgage is now owned by.....Freddie Mac.
Who knew? Nowhere on my monthly statements does it say: "Your mortgage is now owned by Freddie Mac." Rogers couldn't say what Freddie Mac had done with our mortgage-whether it has sliced it and diced it into some sort of complex security instrument.
My guess is most people out there are equally in the dark. Whither our home mortgages? None of us know. Meanwhile, our representatives in Congress, who depend on the financial sector to fill their campaign coffers, did little in the way of oversight of the industry. Federal agencies let the banks run wild. And now we're getting a crash course in how what we don't know is hurting us, to the tune of a $700 billion taxpayer bailout and counting.
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Take it from someone who's in the mortgage business
I don't think that pooling mortgages is necessarily a bad thing. The lender I work for transfers servicing on 100% of the loans it writes, mainly through Fannie or Freddie, to another bank. This actually is beneficial - instead of having to tie up capital servicing the loans indefinitely, or having to keep hundreds of millions of dollars on reserve to hedge against potential losses, we transfer the loan to another lender, which frees up our money to make more loans. This helps keep our costs and rates down.
The system works well with good borrowers like you becase your loan, and the other loans of similar quality that it's bundled with, are not very risky investments.
It's the pools of subprime loans and "exotic" loan products made to people whose main qualifications were a verifiable Social Security number and a pulse, that have destroyed the market. These pools of loans are horrible investments because of the default rates, which means lenders can't bundle and sell them like your loan.
For example, WaMu, one of the prime offenders when it came to doing exotic loan products, couldn't securitize and sell them. This meant that they had to keep billions in capital tied up to hedge against losses on these loans. And when 20% of them started going bad, it caused such a strain on their capital that they were not able to cover the depository assets that their non-mortgage customers had with them. That's why WaMu failed.
So, I don't think securitizing loans was necessarily a bad thing - it was securitizing the stinky ones that killed the market.