"The problem is: Real estate is local, but the money is national."

Tangle of loans feeds foreclosure crisis

Borrowers can't tell where to turn for change in terms

By Robert Gavin, Globe Staff | July 31, 2007

Each 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 home scheduled for later 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 in Massachusetts, 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: 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 Massachusetts officials and housing advocates to defuse the burgeoning foreclosure crisis.

For example, Lawrence Community Works, a 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 L. 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 last 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.

The Martinellis bought their single-family home on Beaconsfield Street in 1994 for $92,000. A decade later, they refinanced for a third time, a $274,000 adjustable-rate mortgage, to finish paying for an addition to accommodate their son, Stephen, who was disabled after being severely injured in a car crash. They had hoped to refinance once again before the interest rate reset in 2006, but couldn't because of credit problems related to their son's medical issues.

They fell behind on loan payments this spring, after two rate adjustments within a year had boosted their monthly payment to $3,033, from $2,100. They began calling Chase in May to find a way to catch up. They even sent a partial payment.

But the check was returned, uncashed, and customer service agents at Chase said nothing could be done because foreclosure was already underway. An auction of their home is scheduled for Thursday.

The couple turned to an advocacy group, Association of Community Organizations for Reform Now, or ACORN, where a loan counselor asked Chase to reduce the interest rate. In July, Chase said the unnamed investor who held the mortgage would not modify the loan.

It was then that the Martinellis learned someone other than Chase held their mortgage.

"It made us feel more than powerless," Martinelli said in a telephone interview. "It made us feel lifeless. It sucked all the life out of us."

But on Friday, after the Globe contacted Chase about the Martinellis, the couple learned the investor who holds their loan had agreed to stop foreclosure proceedings and reduce the rate to the original 7.2 percent. A Chase spokeswoman said news media inquiries have "no bearing on the decisions that are made."

Kim Martinelli said she was relieved, but is still nervous as she awaits written confirmation.

"The really scariest part is what would I do with my son if they did auction my house," she said. "My heart just breaks at the thought of having to put him in a nursing home."