Question: We decided to jump on the refinance bandwagon but did not want to pay all the costs involved in the process. We contacted our current lender to inquire about a "note modification." We were told that they do make note modifications but since our loan was sold to Freddie Mac, they are unable to accommodate us. I don't quite understand this because we still make payments to our lender, not Freddie Mac. How can a lender just sell our loan without notifying us? Can we get a note modification from Freddie Mac?

Answer: Back in the old days, families would deposit their savings at a savings and loan association and earn interest. The S&L would then take the deposits and make loans to folks who want to buy a house. The lender would charge a slightly higher rate of interest than it was paying out to the depositors. Basically, everything stayed very close to home. Recall how the Bailey Building and Loan Association operated in the Christmas movie, "It's a Wonderful Life."

Today, it's a lot more complicated. In order for lenders to make more loans, it sells its notes on the "secondary market." The Federal Home Loan Mortgage Corporation, better known as Freddie Mac, is the nation's second largest purchaser of fixed rate home mortgages. Let me briefly describe step-by-step what might happen:

1. You go to a mortgage broker who finds a great rate and processes your loan application.

2. The loan is closed and funded by a wholesale lender. Your mortgage payments will go to this lender.

3. Sometime after the loan closes, the lender sells the loan to Freddie Mac. The sale replenishes the lender's capital so it can make another loan.

4. Freddie Mac buys thousands of loans in bulk from lenders across the country and packages such loans together in order to create mortgage backed securities.

5. Freddie Mac will sell the mortgage backed securities on Wall Street.

6. Wall Street financial firms will then peddle their mortgage backed securities to people like you and me who are looking for a good investment to put our savings.

Okay, now I can answer your questions. You can't go to Freddie Mac to modify your note because it's part of a multi-million dollar marketable security.

You make your mortgage payments directly to your lender because your lender retained the servicing rights to your loan. Your lender does all the work to collect the mortgage payment and communicate with the borrower but it doesn't own the mortgage note. It does, however, receive an income stream for servicing the loan. Banks enjoy this arrangement because it provides steady revenue.

So the answer is yes -- your lender can sell your loan without notifying you. But the original terms can't change. However, if your lender decides to sell the servicing rights, you are required by law to be notified within 15 days of the transfer because your mortgage payment will go to a different financial institution.

Published: August 14, 2003

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