Mortgage companies buy and sell mortgages frequently. Some companies sell the mortgage notes, but retain the servicing rights. Other companies purchase servicing rights without buying the mortgage. Others buy both the note and the servicing rights. These are business assets and investments, which change hands often. From the borrower's standpoint, nothing about the loan can change as a result of a mortgage being transferred.
Most homeowners know only about the transfer of the servicing rights. The servicing rights determine the company the homeowner pays and contacts for customer service issues. Often the company that receives the payments does not own the mortgage, even if the company is the one that closed the loan. Many large banks sell the mortgages to large mortgage investment companies. They package these mortgages into pools and sell them, which frees up money to close more mortgages in the future.
When a bank or mortgage lender sells loans, it creates groups or pools of loans called mortgage-backed securities (MBS). These are simply a group of tens or hundreds of millions of dollars of loans that are sold to mortgage investors. The companies buy the loans and sometimes buy the servicing rights. Often the sale is prenegotiated by both parties based on existing agreements. Many mortgage companies do not have enough money to lend for every mortgage and retain ownership, so they must sell the mortgages to free up capital for future mortgage closings. Only some of the largest companies, such as Fannie Mae or Freddie Mac, hold billions or trillions of dollars in mortgages.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are the nation’s two largest mortgage investors. They do not originate or close mortgage loans; they only buy mortgages from approved lenders. They also do not service mortgage loans; they pay other companies a premium to service the loans. If a lender sells a pool of mortgages to one of these companies, and the lender does not service loans, the servicing rights transfer to a different mortgage company or bank that does service loans. The new servicer assumes the responsibility of receiving the payments and managing the escrow account. This must be done within the rules protecting homeowners during this transfer period.
Homeowners have certain rights during the loan transfer period. Each lender must notify the borrower in writing of the pending transfer. The lender typically allows 60 or 90 days for the transfer to be completed. This doesn’t mean the homeowner doesn’t have to make the payments. It just means he may pay either company during this period. The mortgage company cannot mark a payment late during the transfer period if the payment was received by the new lender before the transfer was completed or by the former lender after the transfer. They must work together to protect the borrower’s credit history during this time.