Securitization (or, why you can’t work out a lower mortgage payment)

“Securitization” is a hot word in money circles, but I don’t think many people outside of Wall Street know what securitization is or what it means. The Wikipedia entry on securitization is very good, but a bit technical. I think I can boil it down a bit more.

Any asset can be securitized. One asset we are talking about a lot these days is a mortgage. To a bank, a mortgage is an asset because it makes them money. Every month, someone sends (or is supposed to send) a payment.

A mortgage as an asset is worth (on paper) the amount of the loan plus interest. Kind of like a house is worth the value of the house plus improvements. But just like a house is an investment—it could burn down, the market could drop, etc.—so is a mortgage. There is always a risk that the buyer will not pay off the loan. Or that the buyer will refinance or pay it off early. So a lot goes into deciding what a mortgage is really worth.

Anyway, banks “pool”—or securitize—a lot of mortgages into one big security. That just means they package a lot of mortgages up into a big ball of loans. Then they sell the whole package. But they usually sell it in pieces to investors.

The package also has a servicer who is the company you actually write the check to each month. Everyone makes money kind of like a business on the New York Stock Exchange: the company hires employees (servicers) to do the work of the company, they sell shares in the company (the security) to investors raise capital, and investors get dividends and a return on their investment.

So when you can’t make your payment any more (because you have a subprime loan, let’s say), you want to try to renegotiate the terms. But you can’t, because there are dozens or hundreds of people and companies who own an interest in the package of mortgages that your mortgage is a part of. They would have to vote on whether to let you renegotiate your loan for a lower rate or lower payments, unless they already have some procedures and rules in place. Most don’t.

So that is why you cannot renegotiate your mortgage. There is not one person or company to renegotiate it with. There are a lot, and they cannot all be bothered to think about your little piece of their security.