For those of you who currently have a home and a mortgage or perhaps had one in the past, it’s very likely you got what the industry sometimes refers to as a ‘goodbye’ letter from your lender. This is a required communication that informs the consumer that the mortgage you currently have is being sold. To the uninitiated, this letter might seem a bit concerning. After all, you carefully selected your lender, maybe even got your mortgage from the bank where you have your checking and savings accounts, right? So why did your bank decide to sell your loan? Isn’t there any cross-loyalty these days?
Or maybe you’re getting your first mortgage and, among the other numerous documents you’ll sign, is a notice stating what percentage of the loans the lender makes is also sold. Chances are, the answer is 75-100%. In fact, the number is likely 100% with no in-between. You will either initial or sign this piece of paper and return to the mortgage company. But why are loans sold, anyway? Doesn’t the lender want to make money off of the interest being charged each month?
First, your mortgage in its entirety will be sold. You’ll never see it again. But who do you send your monthly payments to if the loan has been transferred to a third party? In reality, you won’t be sending your payment to the lender, but instead to the loan ‘servicer.’ The loan servicer is so named because the company has agreed to collect the monthly payments each month on behalf of whoever owns your loan. The servicer collects the funds each month while also monitoring other transactional aspects of your loan.
When you review your credit report and see the mortgage listed, it’s the servicer that uploads the information to the credit bureaus. The credit report will show not just the original mortgage amount but also the current balance and monthly payment amount. If there are any payments made more than 30 days past the due date, that information will also appear.
Why is selling a loan so critical to the industry? Liquidity. When a lender makes a loan, it has to sell that loan to make sure there’s enough money in the vault to continue making more loans. Actually, there is no vault, but a line of credit the lender has. If loans couldn’t be sold, at some point the lender becomes non-liquid and can’t make any more loans. If you spread that inability across the spectrum, the lending industry would freeze and the only ones that could buy a home would be those that have enough cash in the bank.
When, not if, you get a goodbye letter, that’s a good thing. It’s a sign of a healthy real estate market.
