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Right, okay... so let's say I walked into my local bank and took out a mortgage, which was then sent to Bear Stearns, which then collapsed. JP Morgan Chase boug

by jeromec 16y ago

Right, okay... so let's say I walked into my local bank and took out a mortgage, which was then sent to Bear Stearns, which then collapsed. JP Morgan Chase bought those assets, so I guess my mortgage would now be held by JP Morgan Chase...

btilly 16y ago
No, actually here is what probably happened. Bear Stearns created a small shell company with a detailed and interesting charter. They loaned this company a large sum of money, in return for a set of bonds. The company used that money to purchase the loans from Bear Stearns. At this point Bear Stearns owns bonds whose value is approximately that of the loans. (Actually slightly more because the bonds are structured to better meet investor's needs.) They then turned around and sold the bonds to investors. One of those investors (in theory it doesn't have to happen this way, but in practice it does) gets both the most risky piece of the investment, and a contract to run the company by rules specified in the company charter. That investor is called the servicer, and they are responsible for the day to day activities of the company. Which mostly consist of collecting loan payments, paying out the bonds, and making detailed records available to any properly qualified investor. Once the last loan is gone, the company has no assets and goes away. Your loan is now owned by the shell company (which has no employees and exists only to shovel income from loans and send them out again as bonds), which is run by the servicer. JP Morgan Chase did not purchase any connection to this company when they bought Bear Stearns unless Bear Stearns chose to keep some of the bonds. (They did keep some from many deals, and purchased some from deals they didn't do, so they may be an investor.) Control is with the servicer. However it should be noted that the servicer's hands are tied by the charter, and there is very little flexibility in how they can choose to run things. Also note that once the deal goes bad, the servicer's incentive is to run the deal in whatever way maximizes the servicing fees they get. This has proven to result in decisions that are counter to the interests of both investors and people who owe the loans. For instance renegotiating a lower loan that people can actually pay generates less in servicing fees than taking a loan through bankruptcy court. Therefore the servicer often prefers driving loans into bankruptcy even though that is worse for everyone else. Now do you see why this is a mess?
- jeromec 16y ago
  Wow... I think I've got it all, but could you give an example of who would be a "servicer"?
  - btilly 16y ago
    I haven't been in the bond business since 2003, nor did I deal with servicers then, nor did I deal with user loans. Therefore I don't know the names. However it looks like http://www.americanbanker.com/mortgage_serv/top-subprime-servicers-at-123109-1018661-1.html http://www.americanbanker.com/mortgage_serv/top-subprime-ser... can give you a bunch of the names and how much servicing they do. I can guarantee you that they will be a bunch of companies you've never heard of from all over the country. Except that if you have one of these loans, then you're familiar with the one who is servicing your loan.
    - jeromec 16y ago
      Thanks for the info. :)
- rbranson 16y ago
  This is awesome info. Thanks!

by jeromec 16y ago

btilly 16y ago

No, actually here is what probably happened. Bear Stearns created a small shell company with a detailed and interesting charter. They loaned this company a large sum of money, in return for a set of bonds. The company used that money to purchase the loans from Bear Stearns. At this point Bear Stearns owns bonds whose value is approximately that of the loans. (Actually slightly more because the bonds are structured to better meet investor's needs.) They then turned around and sold the bonds to investors. One of those investors (in theory it doesn't have to happen this way, but in practice it does) gets both the most risky piece of the investment, and a contract to run the company by rules specified in the company charter. That investor is called the servicer, and they are responsible for the day to day activities of the company. Which mostly consist of collecting loan payments, paying out the bonds, and making detailed records available to any properly qualified investor. Once the last loan is gone, the company has no assets and goes away. Your loan is now owned by the shell company (which has no employees and exists only to shovel income from loans and send them out again as bonds), which is run by the servicer. JP Morgan Chase did not purchase any connection to this company when they bought Bear Stearns unless Bear Stearns chose to keep some of the bonds. (They did keep some from many deals, and purchased some from deals they didn't do, so they may be an investor.) Control is with the servicer. However it should be noted that the servicer's hands are tied by the charter, and there is very little flexibility in how they can choose to run things. Also note that once the deal goes bad, the servicer's incentive is to run the deal in whatever way maximizes the servicing fees they get. This has proven to result in decisions that are counter to the interests of both investors and people who owe the loans. For instance renegotiating a lower loan that people can actually pay generates less in servicing fees than taking a loan through bankruptcy court. Therefore the servicer often prefers driving loans into bankruptcy even though that is worse for everyone else. Now do you see why this is a mess?

jeromec 16y ago
Wow... I think I've got it all, but could you give an example of who would be a "servicer"?
- btilly 16y ago
  I haven't been in the bond business since 2003, nor did I deal with servicers then, nor did I deal with user loans. Therefore I don't know the names. However it looks like http://www.americanbanker.com/mortgage_serv/top-subprime-servicers-at-123109-1018661-1.html http://www.americanbanker.com/mortgage_serv/top-subprime-ser... can give you a bunch of the names and how much servicing they do. I can guarantee you that they will be a bunch of companies you've never heard of from all over the country. Except that if you have one of these loans, then you're familiar with the one who is servicing your loan.
  - jeromec 16y ago
    Thanks for the info. :)
rbranson 16y ago
This is awesome info. Thanks!