When Your Loan Gets Transferred

Today, let’s delve into loan servicing!  My clients Matt and Lydia received a notice that their loan, just three months old, was being transferred to another company.  They encountered issues which is the impetus for today’s article.  What compounded matters was that the couple, eager to pay down their mortgage right away, started making additional early payments.  Their old servicer showed the payments received, but the new servicer didn’t.  Yikes!  What a mess.  Every mortgage out there has a form you signed that allows your loan to be transferred to another servicer at any time.  This could happen to you.

 

Servicing is the term to describe the actions and procedures with collecting your mortgage payments, and what happens with the funds once collected.    Once I explain all the parts, you’ll have a better understanding of what goes on behind the scenes – in case you are ever notified that your mortgage servicer is changing.  Every mortgage loan can be divided into three parts:  Origination, Securitization, and Servicing.  Let’s take a quick review of each phase.

 

Origination:

Origination is the phase most of us are familiar with.  It’s the time in the process from loan application to funding and recordation of your mortgage with the state’s Bureau of Conveyances.  Your Loan Officer, like me, are all part of the origination process.  Banks, Credit Unions, Mortgage Brokers, and Mortgage Bankers all participate in the process.  It’s the process in which your mortgage loan is born and brought into the world.

 

 

Securitization:

An entity advanced the money to fund your transaction.  Once your loan records at the bureau, that funding entity collects all the paperwork - now a small mountain of forms you signed, documents you provided, and all other supporting documents, and readies that massive file to get sold.  In almost all cases, the entity that funded your loan has no intention of keeping your loan on their books for the next 30 years collecting the interest from your payments.  But there are investors in the world that want to park their money in safe investments and earn the interest from it.  Your mortgage funding source will exchange the thousand or so pages that make up your mortgage file with an investor to get their money back (so they can lend it out again!)  Not only do they get the money back they lent you, but they also collect a commission from the investor.  This is the process when a lender sells a loan to entities such as Fannie Mae or Freddie Mac.

 

Some loans are designated as “portfolio” loans.  These loans are kept in-house and never sold.  Residential Portfolio loans are almost always ultimately funded by banks, as they use their depository assets – the money you put into your checking and savings accounts, to fund these transactions.  Because the loan isn’t sold and a commission earned, most portfolio loans require the borrower to pay some flavor of origination fee or discount points.

 

Regardless of your mortgage being a “saleable” loan – sold to an investor, or kept in-house by a bank, we’ve only covered the funding portion of your transaction, and how the lender gets the money to do it all over again.  Selling your mortgage asset is only one piece of the revenue earned by the entity that funded your mortgage. The process of how your mortgage payments are collected and who collects them is in our next section on Servicing – which is the other piece of the origination revenue stream.

 

 

Servicing:

Investors invest.  When they bought your mortgage in the securitization phase, all they bought was the asset.  They don’t have the time or resources to collect individual mortgage payments and keep the ledger updated on your declining balance.  That’s where the business of mortgage servicing comes into play.  Investors will pay a fee to a company willing to collect your payments, keep the ledger, make sure your insurance and taxes are paid, and most important, in the case you stop paying, act on their behalf to foreclose on you.

 

Mortgage Servicing on a big enough scale can be a very lucrative business.  Collecting a fee each month from the investors for the thousands, or even millions of mortgages they service, can generate big bucks.   It’s so lucrative from the revenue stream, that servicers will pay a fee to buy the servicing rights to your loan.

 

 

That’s Where the Money is Made?

All these years you thought the money in the mortgage business was collecting interest – and you’re wrong!  The profits come from taking that freshly originated mortgage and selling the paper asset to investors and selling the servicing rights to a huge national servicer.  Rinse and repeat.

 

 

What Happened to Matt & Lydia?

The lender that funded their loan collected their payments for the first couple of months.  The servicing portion of their loan was then sold to a mortgage servicer.  As with any transaction, sometimes there’s paperwork errors.  When the servicing was sold, not only was the paperwork of payments transferred, but the advanced payments the couple made were also transferred.  Someone at the receiving end didn’t credit those payments to their loan.

 

The good news is that all the payments made by the couple were documented from their bank statements.  It took about a month for the new servicer to finally credit the payments to their account.

 

There are very strict federal laws protecting the consumer against errors like this from affecting your credit.  There’s basically a 60-day window during that transfer period that prohibits any derogatory payment history to be reported to the credit repositories.

 

 

Keep in mind that every mortgage loan carries the provision that your payments can get transferred to a different servicer at any point.  I’ve known some that have had their servicer switch multiple times.  Also know you have rights and protections.

 

 

 

A Personal Note for Thanksgiving

Our country just proved to the world that despite one of the most divisive political seasons I can ever remember, it concluded without uprising or denial of outcome.  This Thanksgiving we are all Americans and live in the greatest nation on the earth.  There are those that say they can’t look past the contrary political beliefs of their relatives and are skipping gathering for our annual festival of thanks.  Maybe it would be a good exercise for those so tightly wound, just for one day, look deeper into their relatives and friends and see them for what they are inside.  Resist the temptation of identifying them for their political or social beliefs.

 

Thanksgiving is the one unique holiday, where for one day, we are to reflect on the people and events in life we are truly thankful for.  And if sadly, none of that exists for you, try and be the focus of someone’s appreciation for your presence in their life.

 

 

 

 

And now the week’s economic news…….

 

Home Sales Rise

With a lack of major economic data outside of the housing sector, it was a quiet week for mortgage markets, and rates ended with little change.

 

In October, sales of existing homes rose modestly from September and were 3% higher than a year ago, the first annual increase in over three years.  The median existing-home price of $407,200 was up 4% from last year at this time.  Inventories remain stuck at historically low levels, standing at just a 4.2-month supply nationally, far below the 6-month supply typical in a balanced market.  On a brighter note, though, inventories were 19% higher than a year ago.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

While the latest report on housing starts was a bit disappointing, the results in many regions were negatively impacted by hurricanes.  In October, single-family housing starts declined 7% from September and were slightly lower than a year ago.  By contrast, single-family building permits, a leading indicator of future construction, increased from September to the highest level since April.  In addition, a separate survey of home builder sentiment on housing market conditions from the NAHB was stronger than expected.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage applications improved modestly this week. According to the latest data from the Mortgage Bankers Association (MBA), applications to refinance rose 2% from last week and were a massive 43% higher than one year ago.  Purchase applications also rose 2% from the prior week but still were down slightly from last year at this time.

 

 

 

Next Week

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy.  For economic reports, New Home Sales will be released on Tuesday.  Personal Income and the PCE price index, the inflation indicator favored by the Fed, will come out on Wednesday.  Mortgage markets will be closed on Thursday and will close early on Friday for Thanksgiving.

 

 

 

Until next week…….