How Does a Loan Servicer Differ from a Collection Agency?

An Example of Mortgage Securitization

Local Prairie Bank issues as many loans as it possibly can issue without over-extending itself. Local Prairie Bank regularly sells its loans to Midwest Mortgage Holding, LLC in order to free up available capital for issuing new loans. Midwest Mortgage Holding, LLC then sells large packages of loans to National Bank Depositor LLC, which is a subsidiary of National Bank Mortgage Trusts, N.A. National Bank Depositor LLC conveys each package of loans into separate securitization trusts. Each trust is governed by its own Pooling and Servicing Agreement.

For example, a loan issued by Local Prairie Bank in June of 2007 became a part of NBMT Asset-Backed Securities Trust, Series 2007-3. This way, if Local Prairie Bank becomes insolvent, there are two "true" sales in between Local Prairie Bank and the securitization trust. This all but eliminates the risk of a bankruptcy trustee clawing back loans into Local Prairie Bank's bankruptcy estate. Bankruptcy trustees are impartial third parties tasked with overseeing bankruptcy cases. They have very broad powers designed to protect the assets of a bankruptcy filer (also known as the bankruptcy estate). Those powers include, among others, recovering assets that were sold shortly before a bankruptcy filing.

National Bank Mortgage Trusts, N.A. assigns its servicing rights in the mortgage loans to American Loan Servicing, Inc., which collects mortgage payments from homeowners and remits the payments to National Bank Mortgage Trusts, N.A. for distribution to the holders of the mortgage securities. So long as each entity in the chain followed the terms set forth in the Pooling and Servicing Agreement, the securitization trust properly owns the loans it holds and should be a stable, long-term investment.

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