Something about this home loan crisis I haven’t been able to figure out: If a bank makes a home loan and then sells it to some investment group to be bundled and resold, who then enacts the foreclosure if the homeowner defaults? Does the original bank or lending institution retain the job of managing the mortgage? Would they be the ones carrying out the foreclosure, or allowing a short sale or renegotiating, or whatever? If so, how would they benefit financially from one of these actions or another? If they foreclosed, presumably they would not own the house; it would be owned by the mortgage fund which purchased the loan.
I think there’s a few ways to do it, but the general idea is that the bank doesn’t really “sell” the mortgage; it’s more like they buy an insurance policy on the mortgage in exchange for passing any mortgage payments (including anything they can recover after default) along to the seller of the insurance.
The bank makes the loan, and then they typicall sell the loan to someone else. Frequently, that “someone else” is a pool of investors rather than a single investor, but “the bank” no longer owns your loan. So where does the homeowner send his mortgage checks to each month? Not the bank, but “the servicer”. There are professional loan servicing companies that take care of all that – the servicing company represents the owner of the loan (whether that owner is “the bank” or a group of investors or whatever) and is responsible for collecting the loan owner’s money and passing it along to the loan owner (in exchange for taking a small percent of the monthly payment themselves, typically about 0.5%).
The servicing company collects the monthly mortgage check, they call the homeowner if he’s late with payment, and if he’s seriously late, they foreclose, sell the house, and then return whatever money is left to the owners of the loan.
Many people oppose mortgage securitization (the idea of “chopping up a bunch of mortgages into a bond and selling it to a bunch of people”) because they claim it means there is no one single person for the homeowner to negotiate with anymore. That is untrue. The servicer company has the power of attorney to negotiate for the loan holder (in fact, it has a fiduciary obligation to engage in such negotiations if it’s in the interests of the loan holder), so if the homeowner wants to negotiate a short sale, he can call the servicer company.
The confusion stems from the fact that some banks have their own servicing department, so even though “the bank” no longer owns your loan, they still service the mortgage. This is why the OP talks about “the bank” and why i put the term in quotes through out my post. But it doesn’t have to be that way. The servicer might just as easily be an entirely differently company from the bank that issued the loan.
So how would a servicer benefit financially from foreclosing? If they receive a percentage of the monthly payment it seems they would be motivated to renegotiate the loan rather than foreclose - just to keep the money flowing.
Because the arrangement between servicer and investor is more complicated than the servicer simply forwarding exactly what it receives (minus fee) each month to the investor. Typically the servicer is responsible for delivering 100% of the scheduled interest to the investor each month - regardless of whether the mortagee made any payment. So if the mortagee isn’t paying in full, the servicer may have to make up the difference and end up losing money.