What should you do if you get a letter in the mail letting you know your mortgage has been sold from the original financing company to a bank?
Is it time to panic or just go on with your daily life like normal? And why do banks sell mortgages in the first place?
Your Mortgage is an Asset to the Mortgage Originator
When a bank originates a mortgage, it becomes an income producing asset on their balance sheet. They’ve already earned some fees from you from loan origination fees, which helps pad their profits on the loan. But they see your loan as an asset, and assets can be sold to new buyers.
Who Buys Mortgages?
Mortgage loans are sold on the secondary mortgage market where, essentially, your loan can be chopped up, combined with other loans, and sold as an investment. This is part of the reason the housing crisis turned into a financial crisis: there were a lot of packaged loans that were supposed to be bringing in a certain amount of interest income that stopped producing interest income at all. Those “safe” mortgage assets were sitting on bank balance sheets and became toxic — if you bought something intending to make consistent income off of it and it doesn’t produce at all, you’ve suddenly lost a lot of money.
There’s a great explanation of how the secondary mortgage market works at Investopedia. It walks through the major players and how your loan can be resold so many times.
Why Banks Sell Mortgages
Why would your bank want to sell your mortgage? First, obviously, is to profit. Second, by getting rid of your mortgage they can free up the capital (the thousands of dollars the bank lent you that it is now on the hook to recoup over the next 15 to 30 years) to then lend to a new borrower. They want to lend to another borrower, and the borrower after that, and so on, so they can earn origination fees, interest income, and commissions for selling the loan.
A bank may originate your loan today and immediately sell it on the secondary market. You may never be made aware of this (except buried deep in the paperwork) because your original bank may continue to service the loan throughout its term.
However, the servicing of your loan can be sold as well. If the lender intends to sell of the servicing of your loan as well, they must must disclose this to you per rules of the National Affordable Housing Act. In this case, when your loan is sold and the servicing with it, you must be notified of the loan-servicing sale no later than 15 days before the sale is to take place. Likewise, the new loan holder has to contact you within 15 days of the sale transfer occurring.
Steps to Take If Your Mortgage is Sold
If your mortgage is sold, you need to take notice and check on a few things.
First, has your loan been sold? Or has the loan and the servicing been sold? This is important because if the servicing has been sold as well your payments will be going to a new address (or a new website). You don’t want to send in a payment to the old servicer, only to have it returned weeks later and finding out you are now late on your mortgage.
You should receive notification in writing of the sale. This notification should give you specific instructions on what to do with your payments.
Second, don’t stop paying your mortgage. Even if you don’t get a follow up letter from the company that bought your loan, you must keep making payments. Usually a letter you receive will tell you that you should send payments to the old servicer up to the date before your next payment is due. On and after the due date, you should send payments into the new company. Again, the notification you receive in writing should indicate what to do.
Third, make sure your payments are processed and applied correctly. Just because you sent in a check and it was deposited doesn’t mean that somewhere in the banking system there isn’t an error showing you having not paid. This is especially true when your mortgage is sold — make absolutely sure the payment went through and was credited to your account correctly.
Aside from that, you have nothing to worry about. Keep paying on your mortgage like you always have, just make sure its to the new mortgage servicer.