The Mechanics Of Mortgage Sales: How Are They Sold?

Mortgages are often sold to other companies or investors, and while this can be frustrating for homeowners, it is a common practice that helps to keep the housing market liquid. The reasons for selling mortgages include freeing up capital to make loans to other borrowers and generating cash by selling the loan to another bank. When a mortgage is sold, the terms of the loan, including the interest rate, remain the same, but the servicing rights may change, meaning the homeowner will have to make payments to a different entity. While there is little homeowners can do to prevent their mortgage from being sold, they are protected by federal law, which requires both the old and new lenders to notify them of the transfer in writing within a specified timeframe.

Why mortgages are sold

There are several reasons why mortgages are sold. Firstly, lenders may sell mortgages to free up capital that can be used to provide loans to other borrowers. This allows for a continuous flow of funds in the housing and financing markets, enabling lenders to offer more loans. By selling mortgages, lenders get back the money they lent, plus a portion of the interest expected over the life of the mortgage.

Secondly, mortgages are financial instruments similar to bonds, which can be bought and sold between investors in the secondary mortgage market. This market involves the trading of mortgage-backed securities, where mortgages are packaged and sold together. The sale of these securities generates cash for the lenders, who can then lend to new borrowers.

Mortgages are commonly sold, and it is important to note that the terms of the loan, including the interest rate, monthly payment, and remaining balance, remain unchanged for the borrower. While it may be frustrating for borrowers to have to adapt to a new servicer, this liquid mortgage market likely helps borrowers access mortgages at lower interest rates.

What happens when a mortgage is sold

It is fairly common for mortgages to be sold, and this often happens multiple times over the course of a loan term. Lenders sell mortgages for various reasons, but usually to free up capital to offer more loans. When a mortgage is sold, a new company is typically buying the servicing rights.

If your mortgage is sold, you will receive a notice about the new servicer. Federal law dictates that you must receive this notice at least 15 days before the switch. Then, within 30 days, the new mortgage owner must send you its name, address, and contact number. You should carefully read this notice, checking for any mention of the mortgage servicer changing. Some lenders retain servicing rights even after selling a mortgage. If the servicer is changing, you should check all the data listed with the old servicer (name, address, email, and other contact info) to make sure it's up to date. You may need to redirect your ACH withdrawal or mail a check to a new address. You should also double-check the effective dates: when the old payments should stop and the new ones should start. There is a 60-day grace period for payments after servicing rights have been sold.

While the terms of the loan—your interest rate, monthly payment, and remaining balance—will not change, it is still important to keep an eye on your information during this transition. Mistakes and errors can happen. You should keep copies of statements from the months surrounding the sale and transfer to a new owner. By holding on to documentation, you can prove that you submitted payments on time in the event of any confusion.

The secondary mortgage market

Several players participate in the secondary mortgage market: mortgage originators (who create the loans), mortgage aggregators (who buy and securitize), and investors. Mortgage originators, usually banks, use their own funds to make the loan, but they can't risk running out of money, so they often sell the loan on the secondary market to replenish their available funds, so they can continue to offer financing to other customers. Mortgage aggregators are responsible for purchasing a high number of loans before packaging these loans into mortgage-backed securities that can be sold to institutional or individual investors. Government-sponsored enterprises function as aggregators, able to buy bank mortgages and resell them to other investors.

How to avoid issues when a mortgage is sold

While mortgages are bought and sold all the time, issues can arise when accounts are transferred between servicers. To avoid problems, there are several steps you can take.

Firstly, be vigilant with your mail. Keep an eye out for any notices or letters regarding a change in servicer. Federal law dictates that you must receive a notice about the change at least 15 days before the switch, and then, within 30 days, the new mortgage owner must send you its name, address, and contact number. If you receive a notice, read it carefully and look for any mention of the mortgage servicer changing. If the servicer is changing, check all the data listed with the old servicer (name, address, email, and other contact info) to make sure it's up to date. Verify the legitimacy of the transaction by contacting your current servicer directly—call the number on your statement or visit the company's website. Do not click any links in an email or call a phone number listed on a "hello" or "goodbye" letter.

Double-check the effective dates of the old and new payments. There is a 60-day grace period after servicing rights have been sold, so if you recently sent a payment to the previous mortgage owner, there is no need to worry. Keep copies of statements from the months surrounding the sale and transfer to a new owner. This documentation will be useful if there is any confusion about payments.

If you have set up automatic payments, be sure to contact the new servicer to see what changes need to be made. If your mortgage payment includes impounds or escrows for property taxes or homeowners' insurance, check your loan balance, how the payment was applied, and your impound/escrow account after making a payment to your new lender.

The impact of mortgage sales on homeowners

The sale of mortgages is a common practice in the mortgage industry. Mortgages are often sold to other companies or investors to free up funds for the lender to offer more loans. This practice ensures a continuous flow of funds in the housing and financing markets. While this may not negatively impact homeowners, it is important for them to be aware of certain aspects of the process.

Firstly, homeowners typically cannot prevent their mortgage from being sold or transferred. This is because the lender has the legal right to sell the mortgage to another entity, lender, or investor, under federal law and the terms of the loan contract. To lower the chance of a sale, homeowners can consider choosing a portfolio lender, or a mortgage provider that retains its loans.

Secondly, homeowners have rights under the Real Estate Settlement Procedures Act (RESPA) to receive information about the transfer. Before a mortgage is sold, the homeowner will receive a notice about the new servicer. Federal law dictates that this notice must be received at least 15 days before the switch, and within 30 days, the new mortgage owner must send their contact details. If the servicer is changing, it is important to check all data, including name, address, email, and other contact information, to ensure it is up to date. Homeowners should also be vigilant about any potential errors or mistakes that may occur during the transition, such as lost mail or processing mistakes.

Finally, while the terms of the loan, including the interest rate, monthly payment, and remaining balance, will remain the same, homeowners must ensure they are sending payments to the right entity. There is a 60-day grace period after servicing rights have been sold, and it is recommended to keep receipts and copies of statements to prove timely payments if needed. Overall, while the sale of mortgages is a common and necessary practice in the industry, homeowners should stay informed and proactive to avoid any potential issues.

Frequently asked questions