Understanding the Fees Banks Charge for Packaging and Reselling Mortgages: MBS and Related Legal Issues
The quick answer is: Banks don’t sell mortgage-backed securities (MBS) the way you might expect. Instead, they package and resell mortgages on the bond market, where investors can buy portions or whole securities. This process, while complex, can be broken down for better understanding.
Introduction to Modern Mortgage Practices
When we delve into mortgages, they no longer behave as they did in the past. In earlier times, the local issuing bank would hold the mortgage on their books for 30 years. Nowadays, the majority of mortgages are originally financed through mortgage banks via mortgage brokers.
Across the United States, over 50% of the mortgages generated each year are sold to either Fannie Mae or Freddie Mac, which are known as Government Sponsored Enterprises (GSEs). These enterprises were first developed in the 1930s in response to the Great Depression. Fannie Mae and Freddie Mac are for-profit companies, with stock ticker numbers on Wall Street, but they are guaranteed by the government against future failure.
Role of Fannie Mae and Freddie Mac
These GSEs purchase mortgages and package them into Mortgage-Backed Securities (MBS). These MBS are then sold onto the bond market on Wall Street, where investors can purchase them. This system is what led to the corruption and the U.S. Financial Crisis of 2008, behind the sub-prime mortgage crisis. It is crucial to understand the nuances of this process to better comprehend the complexities of modern mortgage systems.
Legal and Regulatory Framework
The laws, regulations, and rules surrounding the packaging and reselling of mortgages arise from various sources, including New York or Delaware trust laws, GAAP (Generally Accepted Accounting Principles), SEC (Securities and Exchange Commission), FASB (Federal Accounting Standards Board), and other lesser agencies.
It's worth noting that there have been numerous lawsuits and foreclosures. In many cases, when homeowners ask for a sales receipt or balance sheet showing payment for or ownership of a mortgage, the records indicate that the documents are missing or have not been properly recorded. My friends and I have made a hobby of tracking such cases, and we have reviewed over 100,000 lawsuits and have found that in less than three cases, a loan was accurately shown on a balance sheet.
Implications and Further Reading
This issue highlights the importance of understanding the legal and financial implications of mortgage-backed securities. Investors, homeowners, and banks all play crucial roles in this system, and missteps can lead to significant consequences. To dive deeper into these issues, readers are encouraged to explore further resources on Wall Street, government policies on mortgage-backed securities, and legal frameworks governing financial transactions.
Understanding the fees and processes involved in packaging and reselling mortgages is vital for anyone involved in the mortgage market. Whether you are an investor, a homeowner, or a financial professional, having a comprehensive knowledge of the system can help navigate the complexities and avoid misunderstandings.