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September 20, 1999
"I have been told that any
lender I go to will probably sell my loan. Is that true? Am I justified in
feeling disturbed about this?"
Yes, it is true,
but no, I don�t think you should be disturbed about it.
A majority of borrowers deal with
mortgage brokers, who select the lender for them. It should not matter to
borrowers who work with mortgage brokers that the lenders sell the loans, since
the borrowers didn�t select the lenders in the first place.
Borrowers who contact lenders directly
rather than dealing through mortgage brokers will in most cases find that their
lenders sell the loans soon after closing. This will always be the case
if the lender is a mortgage company (or a "mortgage banker" as they
prefer to be called), because this is what they do; they are in business to
originate loans for sale. Mortgage companies close more than half of all home
loans.
Depository institutions (banks, savings
and loan associations and credit unions) usually sell the fixed-rate mortgages (FRMs)
they write. These institutions fear that if market interest rates rise, their
deposit costs will rise while they are stuck with the lower fixed rates on FRMs
for long periods. They view adjustable rate mortgages (ARMs) as a better fit to
their short-term deposits. Many will only write ARMs; others will write both
ARMs and FRMs but only retain the ARMs.
Bottom line: the only way that borrowers
can be reasonably assured that their loans will not be sold is to take an ARM
from a depository institution. Even that provides no guarantee, since different
institutions prefer different types of ARMs and there is some trading between
institutions.
But why should borrowers care that their
loans are sold? The letters I get suggest two major concerns. First, borrowers
know that if they are remitting their payments to the same entity that loaned
them the money, they aren�t being set up for a scam where they send their
payments to an imposter. This is a valid concern, but it is related to sales of
servicing rights rather than to sales of mortgages.
When a mortgage company writes an 8%
loan, it has 2 assets to sell. One is a 7.75% loan while the second is the right
to service the loan for a "servicing fee" of .25%. This fee is
deducted from the interest payment made by the borrower. The company may sell
both assets to the same buyer, it may sell the assets to different buyers, or it
may sell the loan and retain the servicing asset. This last option is the
general practice among the larger mortgage companies. When this happens, the
borrower will remit the payment to the same entity that made the loan, even
though the loan is sold, because the original lender is the servicing agent of
the new lender.
Any danger of sending money to the wrong
address arises from the sale of servicing rather than the sale of loans.
Servicing rights are bought and sold, in much the same way that some loans are
bought and sold, and this means that borrowers may suddenly find themselves
asked to send their payments to a new servicing agent. This can happen even on
ARMs made and retained by depositories, although it is not common. You can
read about how to protect yourself against this danger in When
Your Lender Goes Bankrupt.
A second concern about loan sales is
that borrowers believe that in the event they have payment problems down the
road, the lender they don't know might be less "understanding" than
the lender who made the loan. There is a sliver of truth in this, but not much
more.
Originating lenders who still own (and
service) loans have complete discretion in dealing with borrowers in distress.
Servicing agents who don't own the loans they service, in contrast, must follow
rule-books written by third parties; they have limited discretion. In general,
however, there is no reason to expect lenders who service their own loans to be
more indulgent. The rule-books used by servicing agents merely codify the major
objective of all lenders when dealing with distressed borrowers, which is to
minimize loss.
The exception is where the originating
lender has relevant information about the distressed borrower that would not be
available to a servicing agent following a rule-book. This might be the case if
the borrower has had multiple dealings with the same institution over many
years. Such cases are uncommon and becoming increasingly so.
Copyright Jack Guttentag 2002
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