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Home Foreclosures: 1.3.3.1 Generally

After a mortgage loan transaction has been consummated a new set of players frequently comes onto the scene. The rise of the secondary mortgage market and the securitization of mortgage loans created an entirely different cast of characters that play roles during the lifespan of a mortgage loan.

Home Foreclosures: 1.3.3.2 Secondary Mortgage Market

The secondary market is not a place like Wall Street. Rather, this term describes the phenomenon by which originating lenders sell their loans to buyers (often called investors), usually in bulk. This enables mortgage companies specializing in home equity lending to originate large numbers of loans with a comparatively small capital base. Some originators may obtain a line of credit from a major bank or firm, originate mortgage loans, sell the loans to the secondary market, and repay the credit line.

Home Foreclosures: 1.3.3.3.1 Introduction

The loan owner is the entity that has the present right to receive payments on the note. When the owner is also the mortgagee or beneficiary of a deed of trust, it has the right to initiate foreclosure proceedings upon default by the borrower.87

Home Foreclosures: 1.3.3.4.1 Introduction

Securitization is the process of packaging loans as securities and selling the rights to the future income stream to investors.97 These rights are pooled in a variety of different ways so that the income stream from a single loan may be divided up and sold as part of two or more different securities. The borrowers’ monthly payments on the loan cover the return to the investors.

Home Foreclosures: 1.3.3.4.2 Players

This subsection lists various players in one type of securitization transaction. But it is important to note that securitizations can be structured in many different ways and the parties involved can be given many different names. It is equally important to realize that these different entities are not unrelated or independent of each other. Instead, a complex web of relationships was consciously worked out in an attempt to insulate various parties from the conduct of the originating lender.

Originator/Lender. The originator of the loans.

Home Foreclosures: 1.3.3.4.3 Documentation of the securitization process

The primary contractual document underlying a securitization transaction is the pooling and servicing agreement (PSA). The PSA establishes the securitization loan trust and the various classes of bondholders. It contains the obligations of the servicer and the various “representations and warranties” of the parties to the transaction. The PSA describes how the servicer is compensated, including which fees collected from a borrower the servicer is entitled to keep.

Home Foreclosures: 1.3.3.5 Mortgage Servicers

The servicer acts as agent for the owner of a mortgage loan. A servicer collects the monthly payments and interacts with the homeowner on behalf of the loan owner. It may hold monies in escrow to pay the property taxes, homeowner’s insurance, or other similar expenses.

Home Foreclosures: 1.3.3.7 Lender’s Foreclosure Attorney

The lender’s foreclosure attorney is also an agent with delegated authority from the mortgage holder, although usually the attorney is hired by the servicer. The attorney appears in the process when the servicer instructs the attorney to accelerate the debt and proceed to foreclosure. The homeowner usually pays the fee for this attorney because the mortgage or loan note specifies that this cost can be passed onto the borrower.

Home Foreclosures: 1.3.3.8 Foreclosing Trustee

In states that use a deed of trust as the underlying security instrument for a home loan, the borrower technically conveys title to the property to a trustee who holds the property for the benefit of the originator or its successor.122 The trustee is typically a title company, escrow company, or other local company specializing in foreclosure services. In certain jurisdictions, foreclosure law firms are designated to serve as trustees.

Home Foreclosures: 1.3.3.9 REO Management Companies

The term “REO” stands for Real Estate Owned. It refers to property that is in possession of the mortgage holder as a result of foreclosure. Holders and/or servicers may outsource the management of these properties to a specialized company. REO management companies may be responsible for preserving and monitoring property after foreclosure, marketing and selling property, and dealing with homeowners that remain on the property after the foreclosure.

Home Foreclosures: 1.1.1 Topics Covered

This treatise provides the law and practical advice for assisting borrowers facing foreclosure of their homes. It examines foreclosures not only in relation to traditional free-standing homes, but also with respect to manufactured homes and condominiums. It covers foreclosure upon private mortgages, government mortgages, condominium liens, tax liens, and reverse mortgages. Forfeiture of land installment contracts and a variety of foreclosure rescue scams from equity skimming schemes to phantom help are also addressed.

Home Foreclosures: 1.1.4 Additional Digital Pleadings, Practice Tools, and Primary Source Materials

As part of the digital version of this treatise, available at www.nclc.org/library, NCLC has included hundreds of legal pleadings, practice tools, and primary source materials relevant to home foreclosures. The digital version contains sample mortgage foreclosure counseling forms and sample requests for information, extensive primary source materials concerning HUD, VA, and Rural Housing Service, and reverse mortgages—federal statutes, regulations, handbooks, and key agency letters.

Home Foreclosures: 1.1.6 Relation of Home Foreclosures to Other NCLC Treatises

Home Foreclosures1 is a new NCLC treatise. Much of the material in this treatise was formerly found in Foreclosures and Mortgage Servicing (5th ed. 2014). As the content of that treatise continued to expand with new legal requirements concerning mortgage servicing, mortgage loan modifications, and home foreclosures, NCLC split that treatise into two new volumes—Home Foreclosures and Mortgage Servicing and Loan Modifications2.

Home Foreclosures: 1.2.1 Overview

Borrowers present many different ways of dealing with financial distress and foreclosure. Some seek legal guidance before the foreclosure process begins, some seek help only when the foreclosure sale is imminent, and others do not seek assistance until after the foreclosure sale has been completed. Some borrowers have detailed records, including loan documents, evidence of payments, and notes of telephone conversations with the servicer. Others may have little information regarding the loan transaction and foreclosure beyond a jumble of bills, collection notices and unopened mail.

Home Foreclosures: 1.2.2.1 Identify the Type of Foreclosure

Foreclosure occurs when real property is sold to satisfy an unpaid debt. The debt is often a home mortgage, but foreclosure can be based on other types of liens, too. Tax liens, mechanics’ liens, and other debts can lead to foreclosure. Foreclosure—the process by which the home is sold—is governed by state law. State laws vary widely and different laws may apply to different types of foreclosure. Therefore, an important first step is to identify what type of foreclosure the client is facing.

Home Foreclosures: 1.2.2.2 Determine Time Constraints

At the outset, identify any deadlines that the homeowner faces, especially any foreclosure sale date. For example, in judicial foreclosures important deadlines may include: the due date for filing an answer in response to the complaint for foreclosure, the date set for redemption, the foreclosure sale date, and the confirmation sale date. Advocates also need to pay attention to deadlines for an appeals in judicial foreclosures.

Home Foreclosures: 1.2.2.3 Understanding the Homeowner’s Objectives

Homeowners seek assistance defending foreclosures for many reasons. Advocates should provide help consistent with the homeowner’s objectives and needs. For example, a homeowner who wants help proving that they have made a particular payment that the servicer claims not to have received needs different legal assistance, and may have different claims, than a borrower with a predatory loan. Borrowers may want to remain in their homes indefinitely, may want to stay for a certain number of years (e.g., until children graduate from high school), or may be willing to give up their homes.

Home Foreclosures: 1.2.2.4 Gather and Review Loan Documents

In defending mortgage loan foreclosures, it is critical to gather and review the loan documents. These documents tell the story about the particular financial transaction and the players involved. Rarely do homeowners’ stories come alive without their own testimony, but sometimes the stories found in the paperwork are more complete than those related by the homeowners. Furthermore, what appears in a paper story is usually irrefutable, and cases can be won on the paperwork alone.

Home Foreclosures: 1.2.2.5 Identify the Critical Parties

Every mortgage transaction brings together a variety of actors. Some are directly involved with the homeowner while others operate behind the scenes. Some appear on the stage at the beginning of the process. Others enter the scene when the homeowner makes payments or defaults. Section 1.3, infra, provides a detailed description of various parties to a mortgage transaction.

Home Foreclosures: 1.2.3 Follow the Money

Before analyzing the legal issues involved in a case, a useful exercise is to consider how the money breaks out in the transaction. Determine into whose pocket each dollar goes. If you are reviewing the origination of the loan, a good way to start is by making four lists.