The mortgage market is certainly complex at times as there are so many functions required to approve a loan.
The mortgage company must order services and reports from these entities just to get to the loan approval stage.
Once a mortgage loan is approved and the loan is closed, there is another world of mortgage functions beyond signing closing papers. It’s called loan servicing. After your loan has closed, your lender may or may not be your loan servicer and if it is the lender may not be your servicer for the life of the loan. Let’s take a deeper look at loan servicing and its many functions.
Loan servicing exists partly because the secondary market exists. Mortgage lending has two primary sources of revenue and function- primary and secondary. The primary or retail market is charged with finding new mortgage loans. Once a loan application reaches a mortgage lender, the lender begins the process of documenting the loan file and making sure the loan is in full compliance with established underwriting guidelines.
Secondary Markets
When lenders do approve loans using established guidelines, the loan is then eligible for resale into the secondary market. Conventional loans are approved using Fannie Mae or Freddie Mac standards and government-backed loans are those with VA loans, FHA and USDA protocol.
Why do lenders sell loans and not just collect the interest each month?
Some do but most mortgage lenders make loans and then sell them in order to replenish credit lines used to approve still more loans. Essentially, a mortgage company makes a decision to either collect interest each month over the life of the loan or sell the loan to another entity and profit from the sale. Upon a sale, the lender will make less by selling compared to collecting interest over the life of the loan but by not selling, the lender would soon run out of money.
At your closing, you signed the note which outlined the terms of your loan. These terms can never change during the life of the loan. If your loan is sold, it’s simply a difference where you make your payments and nothing more.
When a loan is funded and closed the loan enters a new phase. If it is sold to another party that entity will collect the interest during the course of the loan term. Fannie Mae and Freddie Mac were established to do just that- buy loans so that lenders could continue making them and consumers would have more sources of mortgage money and keeping a competitive market. Yet Fannie and Freddie, who buy the vast majority of loans in today’s market, don’t accept the mortgage payments. There is no way for them to accept deposits of any sort, including a mortgage payment.
Servicing Rights of Loan Servicing
The loan servicing rights are also sold, not just the loan. Servicing rights can be obtained with a Service Release Premium, or SRP, which is a function of the interest rate you and your loan officer selected. The lower the rate on the loan, the lower the SRP. Servicing rights can also be purchased throughout the life of the loan.
When borrowers make a monthly mortgage payment, in all likelihood it’s not to the original lender. When the loan is sold, a servicing company takes over the day to day management of the loan. Loan servicers are paid by the entity that owns the loan by either taking a small percentage of the loan or charging the owner of the loan a fee.
Spreading Around the Responsibilities
The loan service collects the principal and interest payment and forwards the appropriate amounts to the owner of the loan. At the same time, loan servicers who collect monthly amounts for escrow or impound accounts are also responsible for forwarding these amounts when due. For example, say a homeowner’s insurance premium is $1,200 per year and each month $100 is sent to the loan servicer along with the principal and interest payment. Approaching the renewal date, the loan servicer forwards the accumulated $1,200 to your insurance company, making sure the policy doesn’t lapse. Loan servicers are also responsible for paying property taxes when due in the same manner.
Loan servicers are also responsible for making sure the payments are made on time. For example, if the payment is made more than 15 days past the due date, the loan servicer will assess a late fee. If a borrower makes extra payments to pay down the loan balance, the servicer makes sure the extra payments go toward reducing the outstanding loan balance. At the same time, when loans fall delinquent, the loan servicer is responsible for following proper default procedures in the state where the property is located. In some states, the servicer must file a lawsuit and prove to a judge the borrowers are more than 90 days past the due date and according to the terms of the note they are justified in foreclosing and recovering the asset.
Why Is This Important?
It’s important to understand who is responsible for certain actions both during the loan approval process and long after the loan has closed. A borrower can apply at a mortgage company who approves the loan using conventional standards.
The lender can then sell the loan to another lender, a bank or any other entity allowed to participate in the secondary market. Some buyers of loans are also the ones who collect the mortgage interest but most farm out the daily duties mortgage management needs to third parties.
A loan could be originally sold to Chase Bank for example who then sells the loan to Fannie Mae yet keeps the servicing rights and collects a fee.
Chase may then decide to sell those rights to yet another servicer. When borrowers have a complaint with their mortgage company loan after the loan has closed, the complaint is more than likely directed at the servicer and not the original buyer of the loan.
Yet when compared to the sheer number of outstanding mortgage loan payments each month, the number of complaints to satisfied borrowers is extremely small.
Are you experiencing issues with your current loan servicer?
Please contact us and we can discuss possible options.
