Why Do Mortgage Companies Sell Your Mortgage?
Understand why mortgage companies sell your mortgage. Learn about this common industry practice, its financial drivers, and what it means for your loan.
When a mortgage company sells your mortgage, ownership of your loan transfers from your original lender to another financial institution. This is a routine financial industry practice. A mortgage sale can involve either the actual ownership of the loan, known as the mortgage note, or the right to manage the loan, referred to as the mortgage servicing rights. Both components can be sold together or separately after a loan is originated.
Understanding the Motivations for Selling Mortgages
Mortgage companies sell loans primarily to manage financial resources and maintain liquidity. By selling existing mortgages, lenders free up capital to originate new loans. This cycle ensures a steady flow of available funds in the housing market, allowing lenders to serve more borrowers.
Selling mortgages also helps lenders manage various financial risks. It can mitigate interest rate risk, protecting the lender from losses if interest rates rise after a loan has been issued. Transferring loans off their balance sheets helps lenders manage credit risk, the possibility of borrower default. This transfer of risk allows the originating lender to reduce its exposure to potential loan losses.
Many mortgage lenders specialize in loan origination, focusing on underwriting and funding rather than holding loans for their full term. Selling mortgages is an efficient business model that optimizes profitability. Lenders generate income from loan origination fees and from the sale of the loan itself.
The secondary mortgage market facilitates these sales. Government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac purchase mortgages from original lenders. They buy loans, bundle them into mortgage-backed securities, and sell them to investors, ensuring lenders have a ready market to offload loans.
This system provides liquidity to the mortgage market, making funds available for new home loans. Fannie Mae and Freddie Mac’s demand allows lenders to continue lending even if they do not hold every loan they originate. Their involvement helps standardize loan requirements, streamlining the sale process.
The Mechanics of a Mortgage Sale
When a mortgage is sold, it involves two distinct parts: the mortgage note and the mortgage servicing rights. The mortgage note represents the actual debt, or ownership of the loan. Mortgage servicing rights refer to administrative tasks like collecting payments, maintaining escrow accounts, and handling customer inquiries.
The mortgage note is often sold to an investor, while servicing rights are transferred to a separate company or retained by the original lender. Borrowers receive official notifications when loan ownership or servicing is transferred, as mandated by federal regulations.
The Real Estate Settlement Procedures Act (RESPA) requires specific notices when mortgage servicing rights are transferred. The transferring servicer must send a notice to the borrower at least 15 days before the transfer’s effective date. The new servicer must also send a notice no more than 15 days after the effective date. These notices must contain the effective date, the new servicer’s contact information, and the date they will begin accepting payments. They also assure the borrower that loan terms, other than servicing, will not change.
A grace period protects borrowers during the transition. For 60 days following the servicing transfer, if a borrower mistakenly sends a payment to the old servicer, it cannot be treated as late.
What it Means for Borrowers
A frequent concern for borrowers when their mortgage is sold is whether the terms of their loan will change. It is important to understand that the original terms of the loan agreement, including the interest rate, principal balance, payment schedule, and loan duration, generally remain unchanged regardless of who owns or services the mortgage. The legal contract you signed for your mortgage continues to be valid.
While the loan terms remain the same, the payment process may require adjustment. Borrowers will need to send payments to a new address, access a different online portal, or set up new direct debit arrangements with the new servicer. The notification letters from both the old and new servicers will provide clear instructions on where and how to send payments.
Escrow accounts, which hold funds for property taxes and homeowner’s insurance, are also transferred along with the servicing of the loan. The new servicer becomes responsible for managing these funds and ensuring timely payments of your property-related expenses. Your escrow balance is protected and transferred to the new servicer, who will continue to disburse payments as due.
For any questions or issues regarding the loan, borrowers will now need to contact the new servicer. The new servicer takes over all customer service responsibilities, including providing statements, answering inquiries, and assisting with any payment-related concerns. Maintaining open communication with the new servicer is important for a smooth transition.
Federal consumer protection laws, such as the Real Estate Settlement Procedures Act (RESPA), provide safeguards for borrowers throughout the mortgage transfer process. These laws ensure that borrowers receive timely and accurate information about the transfer and establish procedures for handling inquiries and disputes. These protections are designed to minimize disruption and protect borrowers’ rights.