21 Nov Solving the Foreclosure Crisis – Part 3 â€“ What is the Pooling and Servicing Agreement?
As explained in Part 2 of this series, the Pooling and Servicing Agreement is the â€œglueâ€ that binds all of the securitization players together. The PSA is typically filed with the Securities and Exchange Commission, although you might have to dig a bit to find the one that governs the securitized trust that owns your loan.
The PSA is designed to comply with the Internal Revenue Serviceâ€™s REMIC rules to ensure that the trust enjoys pass-through tax liability. In other words, the investors of the trust (a.k.a. certificateholders) get paid the average rate of return on the thousands of home loans without the U.S. Government getting a cut first.
Of course, the earnings are taxable at the individual taxpayer level, but each individual investor has its own tax strategy, and the pass-through status improves the return on investment. Failure to comply with the PSA will destroy the tax-free status of the trust, causing significant losses to the investors.
As I stated, the PSA is a very long and complex document, but some of its general features need to be understood by the homeowner wishing to combat his or her pending foreclosure:
â€¢ The PSA requires that all promissory notes must be endorsed by the originator and delivered to the trustee shortly after the creation of the trust. Similarly, an Assignment of Mortgage must accompany each note. In reality, this NEVER happens, and the consequences of this failure are potentially catastrophic for the trust. I surmise that the mortgage-backed securities market was so white-hot that actual delivery of these critical documents just got in the way of an â€œefficientâ€ process.
â€¢ The PSA requires the servicer to make mortgage payments to the trust regardless of whether it actually receives the payment from the homeowner. The only way to stop paying the monthly payment is to foreclose on the home.
â€¢ The pool is static, which means only 5% of the 10,000 mortgages can be modified without destroying the REMIC status. Essentially, this is why a government purchase of troubled loans is impossible. The only way to modify loans pooled together in the securitized trust is to change the bankruptcy code, providing a bankruptcy judge the power to do it.
â€¢ Default servicing pays more money. The trust has an escrow account to pay litigation fees to servicers, and the servicer gets to keep all late fees and junk fees paid by the homeowner. This means the servicer is incentivized to default a home loan and its motivation is at odds with its client, the securitized trust.
â€¢ The largest default servicer in the country is based in Jacksonville â€“ Fidelity National Default Solutions (now known as LPS Default Title and Closing). This is essentially a shadow company that makes itâ€™s money through both legitimate and nefarious methods. It has been known to fabricate loan data, create falsified court documents and charge illegal fees to homeowners. FNDS hires the foreclosure lawyers on behalf of the securitized trust and does not permit the lawyers to directly communicate with the trust, even though the trust is the actual plaintiff in the case.
This list is just the tip of the iceberg, and it is designed to give the homeowner a start in the right direction. There are other, more in-depth, explanations of a PSA, and this will hopefully provide a foundation for deeper study of this complex document.
In general, foreclosure is unfair to homeowners and frequently retards the due process that should be afforded to the borrower. The final installment of this series is a discussion of problems and solutions for judicial foreclosure process existing in Florida specifically and nationwide in general.
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