WHAT DOES IT MEAN WHEN LOANS ARE SECURITIZED?
When people say that your “loan was sold on the secondary market” usually they mean that your loan was immediately sold off after it was originated. The financial institution that purchases the loan is purchasing a negotiable instrument and since they were “assigned” the loan and the right to receive payment, they are known as the loan “assignee.”
Now, sometimes the party that purchases the loan, (the loan assignee) seeks to securitize the loan which basically involves taking your promissory note and “pooling” your note with about a thousand other loans, for example. These loan pools are then usually managed by a Trustee and an agreement is entered into between the trustee and loan servicer as to rights and duties in regard to servicing the loan and dealing with the money collected.
These loan pools are then divided into tranches, or products that may wet the appetite of individual investors such as hedge funds, insurance companies, foreign investors and others who purchase “asset backed securities” that were supposedly secured by the loan pools.
So, in many cases, you get a loan and that loan is sold off to another party (financial institution) who purchases your loan and may securitize the loan to be sold to Wall Street investors, who are the party entitled to ultimate payment on the loan.
Note, the Secondary market may therefore consist of Fannie Mae and Freddie Mac (a quasi-governmental agency that securitizes loans) or a “Private label” loan securitizer that uses Investment bankers / loan aggregators to help them securitize the loans.
The one major draw-back of having a loan securitized is that the Trustee (who is appointed to manage the trust) and the Loan Assignee (which is the owner of the loan – ex. investor who funded the loan) will claim they are “holders in due course” and not liable for any predatory lending practices of the loan assignor. We discuss the holder in due course in more detail below. In the context of seeking a loan modification, this may make it a tougher case to muster legal leverage following a mortgage file review, or forensic loan audit that identifies predatory lending practices of a loan originator.