A letter arrives in the mail and tells you your mortgage has been sold. It also informs you to send your monthly payments to a new address. Don’t panic! This happens all the time, and you shouldn’t see many (if any) changes.
“I would say probably 30% to 50% of the time [borrowers are] going to eventually end up mailing their payments somewhere else different from when they first originated it,” says Rocke Andrews, president of the National Association of Mortgage Brokers.
So why does your mortgage get sold—and why can it happen multiple times? Banks and mortgage servicers constantly check the numbers to find a way to make a buck on your big loan. It all takes place behind the scenes, and you find out the result only when you get that aforementioned letter in the mail.
What does a mortgage being sold mean for homeowners?
The short version: When a loan is sold, the terms of that loan don’t change. But where a mortgage-holder submits payment and receives customer service may change as the loan gets sold. And that could affect a few things.
“The level of service that you receive may vary depending upon who the servicer is,” Andrews says. “Certain servicers might offshore a lot of that [work]. So when you would call into servicing you could get a call center in India or over in Asia somewhere and people were less than knowledgeable about the product.”
But service issues that lead to frustration are the exception, not the rule, says Andrews. “Most [consumers] don’t deal with the servicers that much, they just send in a payment and things are happy.”
The new servicer might offer different payment options and may have different fees associated with payment types, so be sure to check any auto payment or bill pay functions you’ve set up.
The basics of mortgage servicing
To understand why mortgages are sold, it’s important to understand some basics.
First, when you take out a mortgage to buy a home, a lender approves your loan and you make payments to a loan servicer. Sometimes, the servicer and the lender are one and the same. More often, they’re not.
The servicer “collects the payment and disburses it out,” Andrews says. “They distribute the payment to the investors, [send] property taxes to the local taxing entity, and [pay] homeowners insurance. They are taking care of all the payments coming in and getting them distributed to the people they belong to.”
Andrews says a small portion of the interest you pay on a loan—often a quarter of a percent—goes to the servicer.
“Typically servicing is a labor-intensive business—there are only five or six servicers [nationwide] that probably handle 75% to 80% of all the mortgages in the United States,” Andrews explains. Major players include Chase, Wells Fargo, Citibank, Freedom, and Mr. Cooper. Some of these companies service the loans they originate.
Servicers can sell your mortgage
Lenders can enter agreements with servicers to purchase batches of loan servicing. Or lenders may shop around for a servicer if they’re carrying too many loans on their books.
Servicers are interested in buying loans in order to sell other products to their new-found customers. Andrews uses an example of a big bank that can then attempt to sell retirement funds, credit cards, or other profitable financial product to customers they had no prior relationship with.
Many lenders originate loans, and then proceed to sell off the servicing or the loan itself. If the servicer changes, the customer must receive a notification. There will be a grace period in case a borrower accidentally sends payment to the wrong place.
Lenders often sell the loans to financiers as a mortgage-backed security for investors or to government-sponsored entities like Fannie Mae, Freddie Mac, and Ginnie Mae.
So why does my mortgage get sold?
Loan servicers are businesses in search of a profit. Andrews says the value of the servicing depends on two main factors:
- Whether a borrower pays on time or not
- How long the borrower will be paying
If a servicer receives a quarter percent for servicing a 30-year mortgage, a consumer who pays steadily for the life of the loan is more valuable than a borrower who opts for a refinance within a few years.
Keep in mind: During a refinance, the new loan pays off the old loan, and new terms are set. So if a servicer was expecting to earn a quarter of a percent over 30 years and the borrower refinances after only five years, the servicer gets the share for five years as opposed to 30.
For example, if you have a $100,000 loan at 4% for 30 years, you’d pay about $70,000 in interest over the life of the loan. However, the lender would need to wait a full 30 years to make that full $70,000. In hopes of a quicker profit, lenders will often sell the loan.
If servicing a loan costs more than the money it brings in, lenders may attempt to sell the servicing of it to lower their costs. The lender may also sell the loan itself to free up money in order to make more loans.
Loan servicers have another consideration in play. They need to pay investors who buy mortgage-backed securities—even if a consumer with a mortgage can’t make payments or is in forbearance.
“The downside to forbearance is the servicing company has to make your payment for you,” Andrews says. “That’s why we’re running into problems.”
With millions of homeowners asking for forbearance, Andrews predicts more mortgages will be sold.
Can I state that I don’t want my mortgage sold?
Somewhere in the terms and conditions of your mortgage paperwork, it likely says your mortgage can be sold. Andrews says there is really no way to keep it from happening.
The trade-off for the odd behind-the-scenes shuffling of your mortgage is a lower interest rate for you—the all-important borrower.
“It’s just part of making the entire mortgage industry safer, more liquid,” Andrews says. “Back in the old days you would go to the bank and make your payment at the bank.” The rates depended on how much money the bank had and the area economy.
But instead of the bygone days of interacting with the local banker, nationwide competition for your borrowing needs has been unlocked.
“By nationalizing the mortgage market, you provide lower rates and better options to the consumer,” says Andrews.