Deal or No Deal? Part One

Last week, Gov. Arnold Schwarzenegger announced he had struck a deal with four subprime lenders.  While you've heard of the first two, Countrywide and GMAC, they are originators of some subprime loans.  The other two might need a little introduction, Litton and HomeEq.  Litton and HomeEq are both Subprime Servicing Companies.  Combined, these four service nearly one quarter of all subprime loans in California.

SERVICERS ARE DIFFERENT 

Although they lend some money, their primary function is NOT originating loans.  They are not Lenders.  They make money by sending out the bills, collecting the payments and if need be calling the borrowers to see when they might be making their payments. 

LENDING VS. SERVICING

When you applied for a loan there was a form that explains that while ABC Bank might lend you the money, they can and probably will sell your Note in the future to someone else while continuing to service your loan.  You remember that form, right? 

The other two companies, Countrywide or GMAC are not in the business of holding mortgage paper either.  Most every loan they can sell - they will.  In this way they have more money available to lend the next person.  That's a good thing.  We want them to have money available to lend.

THE DEVIL IS IN THE DETAILS

Here's where I have a problem with Arnold's deal.  He's not talking to the right people.  Chances are that these guys don't own the loan anymore.  To modify or change the terms of the loans the Owner of the Note will have to agree to the new terms.  But who is that new owner?  If the loan has been securitized it might not be a single entity but a myriad of tranches that own the loan.

Back in July I found a great explanation as to how these loans are sold and divided.  Watch this video by CNBC.  Halfway through Steve says,  "Jane is actually in all 5 pieces here".

So Jane's loan is owned in part by 5 different hedge funds or investors. 

Part Two tomorrow...