Who Really Owns Your Mortgage and Does It Matter?
The following is a guest post (but not a sponsored post!) from Tali Wee of Zillow.com. I was invited to visit Zillow headquarters in Seattle in September and I think they are an awesome company that researches one of my favorite topics: real estate. I’m excited to share good information on understanding real estate and mortgages with my readers!
New homeowners often become shocked when they find out their lender sold their loan to an investor they’ve never heard of, just weeks after they purchased their home. Throughout the process of buying a home, a lender and borrower work closely for weeks. They build a trusting relationship by meeting to review financial options and sending documents back and forth in a frenzy. It may seem disrespectful to be informed via snail-mail that the close relationship with your lender is ending, and your loan has been sold.
Rest assured, the letter is not junk mail, and the action is not fraudulent or a reflection of how the lender views the homeowner personally. It’s highly common and nothing to worry about! Before panicking, remember all of the paperwork is signed. The terms of the loan have been agreed upon and cannot change even though a new lender will be collecting the payment.
What Should The Homeowner Know?
When a loan is sold, the homeowner should receive a letter from their current lender stating the loan has been sold to another lender or investor. The homeowner will also receive a letter from the new lender/investor stating it will now be servicing the loan. The letter will include an address to send the monthly payments. The terms of the loan and provisions for delinquencies agreed upon with your originating lender will still apply with the new lender/investor.
What Changes for The Homeowner?
Homeowners will have to use the payment options provided by the new lender. Some lenders will accept online payments, automatic payments or checks by mail. Homeowners will be subject to any fees involved with the new payment options. Review the letter from the new lender; it may instruct the homeowner to notify his/her insurance carrier of the loan transfer. If the loan was originated through a bank where the homeowner was promised benefits, such as free checks, those conditions may no longer apply. Call the originating lender with any questions.
Why Does the Lender Sell The Loan?
Lenders sell loans for two reasons: to make money, and to free up their capital to offer more loans. They earn money through loan origination fees and from interest off monthly mortgage payments. However, creating and selling loans is more lucrative for a lender than holding and servicing loans. The fewer loans a lender is holding, the more money the lender has to loan to new borrowers, increasing earnings of origination fees.
Mortgage brokers sell loans on the secondary mortgage market to earn a commission. The secondary mortgage market consists of loan originators, mortgage aggregators and investors. The loan originators sell loans to borrowers. The aggregators buy individual loans from originators, bundle them into mortgage-backed securities and sell them at a premium to investors.
Does It Matter Who Owns The Loan?
Homeowners’ loans may be at any stage of the above process at any time. Homeowners will be informed by letter as the servicer of their loan transitions from lender to investor. The only thing a homeowner needs to know is where to send the monthly mortgage payment; the rest doesn’t affect the loan. If you borrowed money under signed terms, despite the servicing lender, those terms will remain the same.
News For Future Homeowners
If you are a prospective home buyer considering taking out a loan, don’t worry about the reputation or stability of the originating lender. Go for the best rate. These days, potential buyers can begin their lender search online on Zillow Mortgage Marketplace. You’ll likely work closely with your lender throughout the buying process, but your lender is not your adviser. That working relationship may dissolve just weeks after signing your documents when the loan is sold.
In principle it shouldn’t matter as the contract between mortgagor and mortgagee cannot be changed in law. However it is possible that the new owner to be less or more flexible, to be less or more inclined to make any further advances and to be less or more understanding if you lose your job etc. There are fundamental protections for this sort of thing, at least in the UK.
On the other hand this is the way that the initial mortgage owner makes their money. The write the amount of your mortgage into your account based on the capital requirements and their evaluation of your ability to pay. But once sufficient payments have been made to cover their costs, commission to the sharp salesman and the capital requirements, they used to sell the mortgage on very quickly as any problems would then not be theirs. This was the way the sub-prime mortgages were promoted and I suspect the stricter capital requirements will make this much less common.
So it is not very ethical and if this happens I would look to remortgage with a more reliable source.
I remember when our first mortgage got sold two months after the loan went through – I definitely thought I’d been had! I like that the loan we refinanced a few years ago is still held through the original institution; it feels like some type of loyalty, in a completely loyal-less world.
(BTW, I REALLY liked this post – and the authority/expertise the author had. Thanks for this!)