For anyone who has ever negotiated a loan modification, short sale, or deed-in-lieu, you have heard the refrain from the person on other end of the line. It occurs with such frequency that it has to have been scripted: “I’ll have to check with ‘The Investor’ and get back to you.”
Besides conveying some sense of “Hope for Homeowners” (Isn’t that what these programs were all about?), it evokes an image of the processing agent calling or e-mailing some anonymous “Investor,” perhaps halfway around the world, who will take time out of his busy schedule to crunch the numbers and decide whether your particular distressed housing problem will finally receive some individual attention. You think: “Perhaps ‘The Investor’ will understand and empathize with my hardship?”
Is there anything wrong with this picture? Is it possible there is no “Investor,” and this is just a ruse? Unfortunately, the likelihood of there being an “Investor” who the agent will speak with, is a myth. Why this is perpetuated is beyond me. The ruse is reminiscent of the moment Toto pulled the curtain back in the Emerald City, only to reveal that The Great Oz was a mere mortal, masquerading behind smoke and mirrors.
However, to fully appreciate the Investor Myth requires understanding what happens to borrowers’ loans almost immediately after closing. A detailed explanation is well beyond the scope of this post – so an analogy is in order….
Once your loan closed – through the willing collaboration of our country’s largest lenders, Wall Street investment banks, the major ratings bureaus, AIG, and a Federal Reserve Board and U.S. Treasury with an almost Sgt. Schultz-like refusal to inquire, along with several other enablers – your loan became one small ingredient in a very large “Investment Smoothie” technically known as a Real Estate Mortgage Investment Conduit or “REMIC.” In the run-up to the 2007 collapse of the credit markets and resulting housing crash, thousands of these Smoothies were served up.
We will refer to Americans’ individual residential loans as the fruit tossed into several giant blenders that made up these Smoothies. Some of the fruit was the freshest, healthiest, and best that could be found anywhere – they were like the prime loans made to the most credit-worthy borrowers. However, most Smoothies consisted of fruit with a wide range of freshness (think, no-doc loans, stated income loans, liar loans, sub-prime loans, Alt-A loans, etc.). In the terminology of the investment rating bureaus, some Smoothies were AAA, while others varied to AA, A, BBB, BB, B, and finally down to the dregs, known as the “Residual.” The amazing thing about these Smoothies was that the local food critics, in reality, the ratings bureaus such as Moodys, Fitch and Standard & Poor, had assured all of the Smoothie customers that these drinks were healthy and safe. But in reality, these same critics had already been handsomely paid to advise the Smoothies’ makers how to develop the recipes in the first place – something most people would call a “conflict of interest” since food critics don’t usually take compensation from the restaurants they are evaluating.
So while some Smoothie blenders contained the freshest fruit, most were mixed, in varying amounts, with not-so-fresh fruits. Still others might be characterized as the “Chef’s Surprise” which one would consume at their own peril. Suffice it to say, upon turning the blenders on, each individual piece of fruit – in reality, your home loan along with many others – lost their individual identity. Each now became a part of hundreds of Smoothies, each one with different levels of toxicity. These Smoothies were then served up to hungry customers with varying tastes and appetites. Some were willing to pay more for the healthier drinks, while others were more of the risk-taking variety, and paid less for the drinks with more questionable ingredients. Many purchased Smoothies made from a combination of fruits, ranging from healthy to toxic, under the belief that the good fruit would make the not-so-good fruit less toxic…rather than vice versa.
But there was one thing all the Smoothies had in common: Their recipes were so impossibly complicated that most customers could never quite understand how they were made. But this was of little concern at the time, since they relied upon the food critics’ assurances that the Smoothies were healthy and safe.
And for the folks who wanted to hedge against the risk of actually getting sick, they bought an interesting form of health insurance from a large international “too big to fail” institution, known as AIG. These insurance policies guaranteed that if their insureds fell ill from a particular Smoothie they’d ordered, the company would pay out huge sums of money – far more than the cost of the Smoothies. These unique policies – known in the rarified atmosphere of investment banking as “Credit Default Swaps” or “CDSs,” – became so popular that they were given their own unique name: “The Moral Hazard Smoothie.” And to some, it began to appear as if the insured policy holders actually wanted to get sick from the Smoothie, so they could collect the insurance proceeds. These policies were such a success, that even the folks who cooked up these toxic brews (a.k.a. the Wall Street investment bankers themselves), started buying the Moral Hazard Smoothies, overlooking the fact that they were responsible for creating the Smoothies and touting them as healthy and safe. (This would be like a restaurant chef cooking your meal and at the same time, taking out an insurance policy on your life. At some point one wonders if good insurance trumps good ingredients.)
Who would sip from this mysterious brew? The same folks that invested in the REMICs. These are the “real investors.” But one of the conditions the customers/investors had initially agreed to when they ordered from the Smoothie Menu, was that they could not participate in running the Smoothie business. Nor could they force the chefs to improve their recipes. In security lawyer-speak, theirs was a “passive investment” and they could have no control over the REMICs’ internal operations or decision-making.
So, back to the question “Who is ‘The Investor’ on your loan?” The answer is that no-one really knows. It certainly isn’t the real investors who could number into the thousands, each holding a sliver of interest in your home loan. Remember, following your closing, it was sliced, diced, parceled out (a.k.a. “tranched”) and consumed by thousands of customers/investors. And as passive investors, under federal and state securities laws, these folks are never permitted to have any decision making power – certainly not to give or withhold consent to your requested loan modification, short sale, or other distressed housing solution.
So who does the loan processing agent actually communicate with? Who knows. It is reminiscent of the scene in Fargo, when William H. Macy leaves the customers in his office, ostensibly to ask the boss if he can waive the unauthorized $100 charge for undercoating their new car. If you saw the movie, you know what happens next.
So the next time a loan servicing agent tells that you he or she needs to talk to “The Investor” for consent, tell them you already saw that movie.
