It can be somewhat surprising, especially for those who have just purchased their very first home, to discover the mortgage they recently got has been sold to someone else. The mortgage industry refers to this as a “goodbye letter” which, required by regulation, informs the borrowers their loan was sold and when the loan will be transferred. This could be quite disconcerting for some and even start thinking the loan officer they worked with all this time wasn’t loyal at all as they initially thought. But the reality is, most every mortgage loan that is made will end up being owned by a third party unrelated to the original mortgage company or loan officer.
First though, there’s a difference between who owns your mortgage and who you write the check to each and every month. They really are two different entities. The company you send your payments to is called the “servicer.” The servicer gets paid a fee by the owner of your mortgage to collect payments. The payments are collected and then forwarded to the owner. The servicer can then in turn sell the servicing rights to yet another firm later on down the line. The decision to sell a loan either individually or “in bulk” can be made for a variety of reasons. A servicer may decide to offload the servicing of a mortgage, sell the rights, and collect revenue in that manner instead of getting paid a fee for collecting the payments.
Who owns the loan? Most loans today are owned by Fannie Mae and Freddie Mac. A mortgage company can issue a loan and then turn around and sell it directly to either of these mortgage giants. In fact, most mortgage companies commit to selling a certain amount of loans well in advance of physically issuing a new one. Some loans are sold individually while most are packaged together and sold in bulk. Why do lenders sell loans in the first place? One main reason is for the revenue. Lenders can wait to earn funds from the monthly payments made each month or they can decide to sell the loan to someone else for a fee. It’s a matter of earning revenue over time or immediately upon sale. These loans are sold in what is termed the “secondary” market.
But the other reason why loans are sold is to keep the cash flowing. You might recall an old movie where there was a bank run. Rumor had it the bank was closing down and people ran to close out their accounts. However, the bank didn’t have enough money in its vaults to close out all the accounts because those accounts were used to finance a homes, cars and businesses. In today’s world however, that’s not how mortgage companies manage mortgage funds. Today, a mortgage company operates with a line of credit. When a mortgage company funds a new mortgage, it taps into its line of credit to issue the new home loan. The company sells the loan with the proceeds replacing the funds used to finance the mortgage.
Without the ability to sell a loan, a mortgage company would soon simply run out of money and would no longer be considered a lender because it can no longer lend. This liquidity in the mortgage market is crucial. These loans must also meet specific guidelines. When a mortgage company considers buying home loans from another mortgage company, there really is no way to review each mortgage to make sure it is indeed eligible for sale or purchase. Instead, the original mortgage company insures the loans are approved using established guidelines set forth by Fannie Mae or Freddie Mac. The loans “conform” to Fannie and Freddie standards, hence the term “conforming” loan.
The secondary markets are an important piece in the industry and without it, rates would be higher, loans more difficult to qualify for and harder to come by. When a loan is sold, it’s a good thing and a boon to the mortgage markets.