Rick Richter of Guaranteed Rate
Why do mortgages get sold?
As cliche as this sounds – it’s nothing personal.
Whether you choose to do business with a bank, mortgage banker or mortgage broker, like Guaranteed Rate, the chances of your loan being sold are pretty good. The sale of your loan is not personal, and while you may be apprehensive about the potential sale, there is nothing to fear: the only change you should notice is a different payment address.
But still, this question remains… Why are mortgage loans sold?
Lenders sell loans to clear their credit lines which allows them to lend money to the next borrower. This in turn helps the market grow (i.e., more purchasing, more lending).
Understand, no matter what type of lender you choose to do business with, there is always a chance your loan will be sold.
Will the terms of my loan change if sold?
The terms of your mortgage were agreed upon the day you closed your loan. Included in your mortgage closing package, you signed a Note and Deed of Trust these documents state:
- Note This is your promise to repay your loan, the amount youve borrowed, the interest you will pay and the term of your loan (i.e., 30 years, 20 years, 15 years etc.)
- Deed of Trust Your deed outlines ownership rights to the property and is used to convey property from one person to another. It is this document that protects your lender if you default on your loan.
Signing these documents guarantees the rate and terms of your loan and it makes no difference how many times your loan is sold – these terms will not change. Both you and your lender are protected.
Mortgage Sold
What is sold when my loan is sold?
If your lender is going to sell your loan, they will sell one of two things:
- Servicing
Your lending institution can just sell the servicing of your loan yet continue to make money from the interest you pay.
- Interest and Servicing
Your financial institution can sell your loan and the servicing of your loan.
Selling Loan Servicing
If only the servicing of your loan is sold, your original lender will keep your loan and continue to make money from the interest you pay for borrowing.
The servicing of any mortgage loan includes customer service, payment management, escrow disbursement, collections, foreclosure proceedings and working with delinquent homeowners. In many cases your lender will authorize servicing companies to manage loan modifications.
Lenders sell the servicing of their loans because it is cost-prohibitive; servicing companies set-up systems solely for the purpose of managing loans and servicing loans. For example, a lender may save $400 per year per loan when selling the servicing of your loan. While the savings may seem minimal, if you multiply 400 by millions of loans, the savings is substantial.
Lenders take the servicing of your loan very seriously as customer service and account accuracy is of upmost importance. If your loan has been retained by your lender but your servicing has been sold and youre not happy with your servicer, you should contact your lender and try to resolve any issues.
Selling Your Loan and Servicing
There are many steps involved in selling a mortgage loan so its best to begin with the basics and gain a better understanding of how these financial institutions are structured.
There are two markets:
- Primary Market
The players in the primary market are banks, bankers, brokers, credit unions, savings & loans etc. These financial institutions sell mortgage loans directly to homeowners such as yourself.
Primary Market Facts: Of these financial institutions, banks, credit unions and savings & loans are least likely to sell your loan. This is not to say your loan will never be sold; however, of these primary market institutions these financial institutions typically keep and service their own loans.
- Secondary Market
Loans are sold from the primary market to the secondary market. The players in the secondary market are nationwide lenders (e.g., Wells Fargo and Chase), federal agencies (e.g., Fannie Mae and Freddie Mac) and other financial institutions such as pension funds and insurance companies.
Secondary Market Facts: Nationwide lenders such as Wells Fargo and Chase not only sell mortgage loan products directly to homeowners on the primary market but they buy, sell and service mortgages in the secondary market.
Federal agencies such as Fannie Mae and Freddie Mac buy mortgages from both the primary market and nationwide lenders. Neither of these agencies sell mortgage loans directly to homeowners; they only purchase loans.
What happens to my loan in the secondary market?
Some national lenders like Chase, may keep your loan and service it or it may sell only the servicing. Federal agencies, such as Fannie Mae and Freddie Mac, play a bigger role in the buying of mortgage loans and the impact that purchase has on mortgage rates.
Fannie Mae and Freddie Mac are the biggest buyers of mortgage loans. These government sponsored enterprises (GSE) purchase mortgage loans from the primary market and in the secondary market. To be clear, Fannie Mae and Freddie Mac do not lend money ever they buy mortgages.
- Loan Purchasing
Fannie and Freddie purchase pools of loans at a time from the primary and secondary market. This is the reason your loan officer must be mindful of Fannie and Freddie guidelines because there is a very good chance your loan will be purchased by Fannie Mae or Freddie Mac.
If your loan officer is not mindful of guidelines, Fannie Mae and Freddie Mac can refuse to buy the loan. If this happens, the original lender will have to keep that loan on their credit line or find another investor who is willing to buy the loan.
- Rates
In exchange for the purchased pool of loans Fannie and Freddie offer mortgage backed securities (MBS). Mortgage backed securities are very liquid bonds backed by mortgages. The sale of these bonds are what drive mortgage rates.
The Bottom Line
If your loan is sold and you are clear about where to send your payment, your rate and terms have remained the same and you are receiving good customer service there is no need for concern.
Finally, if you are having a challenge with a company who is servicing your loan and they are not your lender you should contact your direct lender and inform them of your grievances. If you have a complaint about your lender directly you can file a complaint with the Office of the Comptroller of the Currency (OCC). The OCC oversees banks behavior and will knock on their door and quickly question processes, motives and intentions.
Guaranteed Rate, your resource for reliable, easy-to-understand mortgage information.
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