their families.But homeownership rates rose nearly twenty points from the 1940s to the 1960s under the old system. From 1970 to 1990, during the handover of mortgage finance to Wall Street, rates only went up two points.
While Wall Street did well with securitization, it could not dislodge the GSEs from their market dominance. The GSEs still had that implicit backstop of a government rescue. Investors valued that and bought most of their mortgage bonds from Fannie and Freddie. As long as banks tried to compete on a level playing field, packaging carefully underwritten thirty-year fixed-rate loans, they couldnât win.
Salomon Brothers fired Lew Ranieri in 1987. He was a victim of his own success. When the mortgage business standardized,Wall Street investment banks staffed up with Ranieriâs old traders. Another generation would crack the code and beat Fannie and Freddie, finding a new set of mortgage products to slice and dice. Ranieri, who started his own firm, never saw that coming. As he would later tell Fortune magazine,âI wasnât out to invent the biggest floating craps game of all time, but thatâs what happened.â
Once she understood the securitization structure, Lisa Epstein could identify all the component companies and their involvement in her mortgage. DHI Mortgage was the originator that sold Lisa her loan. DHI immediately flipped it to JPMorgan Chase, which became the âdepositor,â in industry parlance. JPMorgan acquired thousands of loans like Lisaâs, pooling them into a mortgage-backed security to sell to investors. To securitize the loans, JPMorgan placed them into a trust (JPMorgan Mortgage Trust 2007-S2), which qualified for REMIC status and its significant tax advantages. The REMIC forced JPMorgan to add an additional link in the securitization chainâin this case, U.S. Bank, trustee for all the assets in the trust. U.S. Bank hired a servicer, Chase Home Finance, to collect monthly payments, handle day-to-day contact with borrowers, and funnel payments to investors through the trust. So Chase had one link in the chain as a depositor and a separate link as a servicer, basically a glorified accounts receivable department.
Investors in the trust get their portion of the monthly mortgage payments, but under the law theyâre merely creditors, holders of JPMorgan Mortgage Trust 2007-S2 pass-through certificates; the trustee, the entity passing payments through to investors, owns the loan. Thatâs why U.S. Bank, not JPMorgan Chase, sued Lisa. JPMorgan Chase gets its proceeds from the sale of the mortgage bonds and walks away. U.S. Bank earns a fee for administering the trust. For performing day-to-day operations on the loans, the servicer, Chase Home Finance, gets a small percentage of the unpaid principal balance, along with any fees generated from servicing. This securitization added an additional wrinkle: the inclusion of Wells Fargo as the securities administrator, with the function of calculating interest and principal payments to the investors. As this involved scrutinizing cash flow from the servicer, it also made Wells Fargo the âmaster servicerâ on the loan. When Chase Home Finance informed Lisa that Wells Fargo was blocking mortgage modifications, it probably had to do with this master servicer role.
At no time was it made clear to Lisa that when she sent in her mortgage payment to Chase Home Finance, somebody at Wells Fargo crunched the numbers on it and told a colleague at Chase to send the money through U.S. Bank to investors, whether a Norwegian sovereign wealth fund or an Indiana public employee retirement plan. Heck, nobody told Lisa that DHI Mortgage would grant her a loan and immediately sell it off to a different division of JPMorgan Chase from the one sheâd been paying all these years. This idea of banks trading mortgage payments like they would baseball cards didnât sit well. And it made it all the more galling to Lisa