If you have ever had any kind of fixed term loan, such as a student or car loan, you know that the loan is rarely serviced by the entity you took it out with. You may have applied for the loan through a particular lender, but eventually you receive notice that some other company you have never heard of is now handling the loan. The mortgage industry works much the same way.
Many lenders you hear with and apply to for mortgages do not actually service their loans. Instead, they sell off their loans on a secondary mortgage security market. This secondary market will then service your loan or hire a servicing company to handle the month to month work of processing payments and so on.
The fact that mortgages are bought and sold by different finance entities can often be a surprise to many borrowers. In truth, it is pretty standard stuff in the mortgage industry. As of the writing of this article, the secondary market has actually been making the news for one of the few times. Why? Well, the secondary market for subprime mortgages has more or less died. Because of high finance rates, financial entities are no longer willing to buy subprime loans at a rate that results in anything other than a loss for the lenders that originated the loan. This is one of the reasons that large subprime lenders such as New Century are going out of business.
So, what exactly does a mortgage service company do? The simple answer is they handle the nuts and bolts of your mortgage. They collect your monthly payment and forward it to the investor or keep it if they own the loan. They also handle escrow and impound account payments if you are required to deposit property taxes and insurance payments. The service provider is also the entity that will be sending you all information on your mortgage, payment status and so on. If you get behind on your payments, you will also hear from the service provider.
When a new service provider takes over your loan, there are a couple of rules that come into effect. First, the service provider has to notify you of the change in writing as well as where to send payments, contact the provider and so on. You are also granted a 60 day period where late fees cannot be charged if you send your payment to the previous lender in error. In short, the law gives you a buffer during the switch.
At the end of the day, you can expect that your mortgage will be sold one and maybe even a few times during its term. For financial companies, a mortgage is more or less considered a stock like you and I would buy. You will know each time it has been sold when you receive notice of a new servicing company.
Dan Lewis is with Great Western Mortgage - providing California mortgage home loans.