This is an archived article that was published on sltrib.com in 2007, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
Every month, Stephen and Kim Martinelli sent their mortgage payment to Chase Home Finance, and when they fell behind, it was Chase that launched foreclosure proceedings, with an auction of their Lawrence, Mass., home scheduled for this week.
The Martinellis, squeezed by the cost of caring for a disabled son and carrying an adjustable-rate mortgage that boosted their monthly payments by $900 over the past year, pleaded with Chase for a break - for a new payment plan, a lower, more affordable rate, or a delay in the foreclosure, due to hardship.
Chase's answer: "No."
What the Martinellis did not know was that Chase was not calling the shots. Chase merely services the loan, acting as bill collector and administrator.
The mortgage was held by an unknown investor, whom Chase declined to identify and who refused to modify the terms of the Martinellis' loan.
They are among thousands of delinquent borrowers caught in the maze of modern mortgage financing as they desperately try to save their homes. Unlike in the last real estate bust, when local banks and credit unions wrote nearly 80 percent of mortgages, most home loans issued today pass through a nationwide chain of brokers, lenders, service companies, Wall Street firms, and investors. That makes tracing ownership difficult, if not impossible.
In a rising real estate market, the system worked well, spreading loan risks among various players and expanding credit and homeownership.
But as foreclosures mount, the system is proving ill-suited to respond, analysts said. The reason is that spreading risk muddled responsibility.
"It's perfect deniability,'' said Patricia McCoy, a University of Connecticut law professor who specializes in financial services. "When there's a problem, each person in line says, 'Don't talk to me, talk to the other person.' "
The system is complicating efforts by state officials and housing advocates nationwide to defuse the burgeoning foreclosure and lending crisis that has disrupted the stock markets and is threatening to drag the U.S. economy into a recession.
For example, Lawrence Community Works, a Massachuesetts nonprofit agency, explored buying some of the vacant foreclosed homes in that city and filling them with graduates of first-time home-buying programs, in an effort to stabilize neighborhoods hit hard by the mortgage crisis.
But Kristen Harol, deputy director of the community group, said her staff can't even figure out whom to call to negotiate purchases of the foreclosed properties.
"We can't get to square one,'' she said. "The problem is, real estate is local, but the money is national.''
Two decades ago, local institutions primarily originated, serviced, and held mortgages. A borrower struggling to make payments might work out a solution with the same banker who made the loan.
Later, financial markets got involved, seeing an opportunity to turn home mortgages into investments that could be packaged and traded for profit. Lenders bundled mortgages together and sold them to investment banks. The investment banks then sold bonds to investors, promising to pay off them off with cash from mortgage payments made by borrowers. These bonds are known as mortgage-backed securities.
"It's a problem because so many hands touch a mortgage during the process," said Steven Antonakes, Massachusetts' commissioner of banks. "The level of responsibility and the ability to effect positive change can vary from relationship to relationship" among the different players.
For example, more than 20 percent of foreclosure actions in Massachusetts in the past year have been initiated on behalf of a unit of Deutsche Bank Group, the German financial services giant, according to ForeclosuresMass.com, which tracks cases. Deutsche, while listed on the deed as the mortgage holder and technically the legal owner, is a trustee for investors such as hedge funds and other financial firms that hold the securities that are backed by these mortgages.
A spokesman said Deutsche Bank has no economic interest in the mortgages and is not responsible for foreclosures or for selling foreclosed property. Such decisions are made by servicing companies, according to contracts with different investor trusts, the spokesman said.
Moreover, mortgage-backed bonds are usually sold with legally binding commitments that create more obstacles for delinquent borrowers. For example, reductions in loan amounts are often needed to keep people from losing homes, but mortgage-backed bonds are usually sold with prohibitions against forgiving loan principal, except in rare cases, said McCoy, the UConn professor.
"Anyone seeking a loan workout is going to have to face these impediments," McCoy said.