The past few weeks, lower interest rates having generated telephone calls from former clients, I was reminded of a phenomenon that exits in the mortgage industry that many of you have experienced. Almost inevitably, the lender that originated your loan is probably not the current servicing entity for your loan.
If you have gone through the loan process during the last few years, you may remember a form (one among many) that gave a percentage breakdown of the amount of loans that your lender sold in the past one, two or three years. It also stated the percentage possibility of your loan being sold within the coming year.
Most lenders, after the loan closes, will notify the borrowers of the terms and conditions of the loan, the mailing address for payments, how payments will be received and usually give an 800-customer service number. At times, either during the closing or after the funding of the loan, your lender will inform you that your loan will be sold and payments will be collected by another lender. The liquidity that exits in the lending industry today is due, in large part, to the pool of money available to mortgage bankers and banks through secondary investors such as FannieMae and Freddie Mac.
These quasi-governmental corporations buy your mortgage and millions of others resulting in pooled mortgages securitized for sale to investors. Although FannieMae, Freddie Mac, insurance companies and other major mortgage investors own your loan, they do not necessarily collect the monthly payment. This is left to the servicer of your loan. At times, the lender that originated your loan will be the servicer.
Often an entity totally unknown to you will collect the payments and forward them on to the investor. If you got your loan through a major depository lender like a bank, that lender may keep your loan in its portfolio as an investment and perform the servicing.
You may wonder,"What does this collector of my mortgage get for doing this job?" The servicer of your mortgage usually gets ¬ to « of 1 percent of the unpaid principal balance per year for the servicing. This may not seem like a lot, but if you service a client base of 500,000 and receive on the low side, ¬ of 1 percent of an average $100,000 mortgage, that is $250.00 per year per loan. Now multiply that $250.00 by the 500,000 clients and that adds up to a very sizeable amount of money. Just 10,000 serviced mortgages will give the servicer a cashflow of 2.5 million dollars per year at $250.00 per loan. Now you can understand why your loan may be sold two, three or more times a year. Lenders pay other lenders for the right to service your loan. Why would a lender sell a loan when it can collect this amount of money?
Servicing lenders that sell may not have the capabilities either in personnel or computer hardware/software to service more than a set number of loans. It also, as you can imagine, generate a sizeable amount of ready cash from the sale of its performing seasoned loans (loans on the books for a time with a good payment history). However, when interest rates drop, mortgage servicers start to get a little concerned. Home owners start to refinance their loans as rates go down. Servicers then experience "portfolio runoff," a faster that anticipated repayment of their loans. They lose their servicing client base and their cash flow.
If the servicer is a publicly traded corporation, its stockholders will not be too happy since the corporation's anticipated earnings are predicated on the servicing dollars generated. A servicing client base also affords the servicer an opportunity to market other products either directly through affiliated companies or by selling or renting client lists to promotional third parties.
To prevent "portfolio runoff" due to lower interest rates and refinance payoffs of their loans, many services will offer current clients the opportunity to refinance through their own lending institution. It is definitely less expensive for the servicing lender to refinance an existing client than to generate a new origination. A client will be solicited either by direct mail, a notice in the statement envelope or through a telephone call.
If you, the homeowner, have not been shopping for a home loan, an offer of « to 3/4 of 1% reduction in your rate may be enticing. Yet, current market rates may be better than the rates offered by your servicer. Lenders will offer to lock in a rate and then proceed with the loan package.
This can be beneficial if rates are tending up or it can cost you money if we are in a downward spiral. If the opportunity presents itself to refinance through your servicer, time is on your side to review the rate quoted by the servicer and take advantage of the opportunity given to shop for a potentially lower rate in the open market.
Your servicer is giving you notice that rates are heading lower; use this time to find out whether the lower rate it offers is better than what you can get by shopping the market. Always, be certain that the rate quoted is a realistic rate not an enticing low ball quote with an unrealistic short lock period. Finally, be certain that all fees are disclosed in writing.
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