The Ins and Outs of the Mortgage Business "Has Your Mortgage Been “Sold”?

The Ins and Outs of the Mortgage Business
By Ron Cahalan EWI Protege and Mortgage Professional

Have you ever been surprised by a letter you receive in the mail instructing you that you are now to make your house payment to another lender and/or loan servicer? It happens often and, if it hasn’t happened to you already, chances are it will. If the lender you originally obtained your mortgage loan from has any knowledge that they may sell your loan and ‘hand-you-off’ to someone else anytime in the future, they are required by law to notify at closing. Those who may purchase your mortgage could be any type of financial institution; a bank, credit union, another mortgage banker or an investor. There are companies that specifically go out in search of mortgages to buy in order to make money off of the ownership of your mortgage. Many homeowners have found that their mortgage passed through the hands of a number of investors or mortgage servicers over the life of their loan. How does a mortgage servicer make money and why or how are mortgages bought and sold? There is an interest-rate spread between the ‘actual net-rate” charged or paid for a mortgage and the rate you pay each month. That “spread” has a value over the term of the loan and, for simplicity purposes, let’s say the spread on your loan is .375% (3/8ths of one percent… which is typical, by the way). If you have a $200,000 loan and the spread is .375%, then for one month this would amount to $62.50 of income to the servicer or an annual income of $750. Lets say that servicer is servicing only 500 loans. The income to that 500 loans ($100 million dollars at an average of $200,000 per loan) would be $375,000 in income. Now you see the value. And, most servicers are managing thousands of mortgages, not just 500. The contract to service all those loans is worth a real measurable value over the assumed life of a loan (say 7 to 10 years). It is the contract or agreement to service your loan that is bought and sold between these servicers. That value can be between 1% and say 2.5% of the loan amount. (Again, we are giving you a simplistic view; it is quite a complex calculation when it comes to Wall Street and bond traders, etc.) That said, let’s say you are a servicer and you have a portfolio you want to sell that equals $100 million dollars in mortgages. The market is fairly aggressive for those contracts and it is willing to pay 1.5% for your portfolio. If you sell that $100 million of mortgages for 1.5% it could bring you an immediate windfall of approximately $1,500,000! But, if that investor kept the contract for an estimated 7 years and earned the $375,000 per year, the realized income would have been over $2.6 million dollars. See the value? Now, the mortgage servicer is going to do a few things for you. They collect your payments every month and process the payments. Then, they send those payments on to the mortgage holder/owner, which is typically a mutual fund or mortgage bond holder. They keep their 3/8ths of a percent income for performing these services. The service they are performing is for the lender, not actually for you as the homeowner. It is also the service of the loan servicer to pay your property taxes and hazard or homeowners insurance for you during the year (most mortgages have the taxes and insurance as a part of the mortgage payment). They also typically send you a statement or coupons to track your payments to the mortgage, the county for taxes and insurance companies paid. They also make the adjustments to your payments and notify you of this should there be a change in your insurance or property taxes or an adjustment in your interest should you have an adjustable rate mortgage. It is also the responsibility of the servicer to counsel you in how to manage your mortgage, help you work through problems and financial crisis and work with you if you have missed payments. They may offer you forbearance or a deferral of principal and interest payments as a temporary remedy to difficulties you may have in your finances. If your problems can’t be worked through and foreclosure ends up being the only option, then the servicer will be the party to carry out that order. Mortgage servicers have to follow the same rules, guidelines and regulations that the bank, credit union and mortgage banker does. If your mortgage is sold to another servicer, it is the responsibility of BOTH servicers to notify you of the transaction. The new servicing company cannot change the terms of your mortgage either. There will be times when your loan is sold and you may have a few glitches with the new servicer. Carry out all of your communications in writing. Never stop paying your payment due to any hassles you may be having between the servicers. The servicer(s) must solve any issues within 60 days. So, should you be concerned when your mortgage is sold? No. Just watch your statements for any mistakes. Track that all the payments are being applied correctly and that your taxes and insurance are being paid per the terms of your mortgage loan documents. Keep all documents you receive from the servicers, including all checks and letters of correspondence. Otherwise, your mortgage activities should be fairly uneventful. E-mail me at RealtorChris@msn.com