Will My Mortgage Loan Be Sold?
September 20, 1999, Reviewed July 27, 2009
"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.
"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.