You open your mail and you receive a (another?) notice that the mortgage for your home has been sold to another financial institution. You know to send your monthly payment to another address and your mortgage statements now come from a different company. But should you be worried?
The process of applying for and maintaining payments on a mortgage can be complex — primarily because of what happens behind the scenes. To make it even more confusing, the company that originally lent you the money to buy your new home will likely sell your mortgage to an investor. This is called the secondary mortgage market.
What’s the secondary mortgage market?
This is where investors — such as Freddie Mac, Fannie Mae, pension funds, hedge funds, other mortgage companies, and banks, for example — purchase assets or loans, including mortgages, as well as the bonds that finance these assets.
While lenders tend to hold high-balance loans in their portfolio, they usually sell most mortgages because that’s the easiest way a lender can generate cash to make new mortgages. Without the secondary mortgage market, lenders wouldn’t be able to originate as many mortgages as they do.
Investors like snapping up mortgages because they’re backed by a tangible asset that you can see and touch, and that builds value over time — your home. Generally, house values go up, but in the event that they don’t and a borrower defaults, the equity in the home, or your down payment, is intended to cover this loss. This is why most lenders restrict a mortgage’s loan-to-value ratio, or LTV, to 80% of the house value.
Does this sale affect me, the borrower?
Yes, and it starts at the application process. But you shouldn’t be worried; it’s nothing you haven’t probably already heard about, especially if you’re been doing your homework. (And law protects you from abuses by the new owner of your loan).
For a lender to be able to sell in the secondary mortgage market, the loans need to meet the requirements of the investor buying them; it makes sense that investors are willing to pay more for higher-quality mortgages.
In essence, mortgages are underwritten so that they can be sold for the best possible price. This is why underwriting guidelines can be strict and why lenders want to see proof of employment and income to make sure you can afford to repay the loan without stretching your budget.
The interest rate you’re offered also reflects the price that investors will pay for your mortgage — and lenders use all kinds of info such as credit score and debt-to-income ratios to determine your overall mortgage-worthiness (read: likelihood of repayment). It’s easier to sell a mortgage in the secondary market when an investor is confident the borrower is unlikely to default.
What happens to borrowers who can’t repay?
The Consumer Financial Protection Bureau (CFPB) works to protect someone who is struggling to pay the mortgage. Even though a new company now owns the loan, this company still has to follow standards to collect on a delinquent mortgage. To prevent servicer abuses, servicers are required to reach out to borrowers to help them solve the problem through options such as a loan modification or short sale before foreclosing on a loan. Servicers are also required to inform borrowers about interest rate changes and balances, for example, so that there are no surprises.
Will the terms change once my mortgage is sold?
Mortgages can be modified, but not unless the borrower and lender both agree on the new terms. The Real Estate Settlement Procedures Act, which also is enforced by the CFPB, prohibits lenders and servicers, as well as any subsequent companies that own your loan, from changing the terms of your mortgage without your consent.
Unless you ask that the interest rate or another term on the note be changed and the lender or new owner agrees, or you agree to a change the lender or new owner proposes, the new owner of your mortgage can’t make any changes.
Call or text me, Lucy Garber, at (310) 293-4866. With over 20 years in the real estate industry, I understand how real estate financing works.