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When a loan is "securitized," it means it was sold by the bank that originally extended the mortgage and bundled together with a bunch of other mortgages by an investment banking firm to sell as "mortgage bonds."

Let's say there is a bank in your town that writes ten mortgages one week on ten different homes. Each mortgage is for exactly $200,000 and has a fixed interest rate of 6% for a 30-year term.

To raise cash, the local bank might decide to take all of those mortgages and sell them to a big investment bank. The local bank sells $2 million worth of mortgages for some cash value (I don't know exactly how they figure out the price exactly), and the big investment bank now owns these ten mortgages. The ten local homeowners continue to make mortgage payments to the local bank, but the payments are passed on through to the big investment bank. The local homeowners may not even know that their mortgages were sold off by the local bank.

Now just imagine the big investment bank doing this same process all over the country, until they own billions of dollars in mortgages on all different kinds of homes. They then create mortgage bonds that are sold off to investors who are looking to get what they think is a safe return on their money.

What is happening now is that large numbers of these homeowners are starting to default on their mortgages, and the whole financial system can't figure out who actually holds the title to the property. This wouldn't be a problem if the local banks that wrote the original mortgages never sold them -- they hold the titles on all properties until the mortgages are paid off. But in the scenario I described above the mortgage has changed hands multiple times and there is no certainty as to who even "owns" a property when the mortgage is in default. Who has the legal authority to foreclose -- The original local bank? The big investment bank that purchased the mortgage? The investors who bought the mortgage bonds created by that investment bank?

You can imagine how confusing this whole thing is now -- and it's only going to get worse.

Thank you soooo much. I read your answer two times and it really clears up a lot.

You wrote, "This wouldn't be a problem if the local banks that wrote the original mortgages never sold them -- they hold the titles on all properties until the mortgages are paid off."
Do you mean that Bank #1 who sold off the original mortgage kept the title even though they sold the mortgage? Or did the titles go along with the sold mortgages....and have gotten lost?