Katie Porter makes an incredibly important point in her recent post about how securitization structures may be impeding mortgage modifications because the ultimate holders of risk on the mortgages are not the ones involved in the modification decision. Mortgage servicers, who typically hold a small interest (if any) in the
loans are the ones making the modification decisions. When servicers
do hold positions in the mortgage-backed securities, they are first
lost positions, so the servicers likely takes a loss regardless of a
modification or foreclosure, meaning that their interests are not
aligned with the other MBS holders.
Let me take Katie’s post a step further and suggest that the relevant voices on the lending side of the mortgage market have not been heard. The ultimate risk on mortgages is held by mortgage-backed securities holders, private mortgage insurers, and pool-level bond insurers. These parties have been entirely absent from the conversation on modification and bankruptcy reform.