Selling loans a common practice

It's the mortgage market's equivalent of a Dear John letter: "Goodbye. It's been nice knowing you, but we've sold your loan to another lender."

Some borrowers receive the missive a few days after they close on their loans. Sometimes it arrives years later. But over the life of the mortgage, practically every homeowner is sure to receive one. In fact, the typical loan may be sold two, three or even four times to other lenders.

In mortgage-industry parlance, it's called a "transfer of servicing." But while many borrowers take the notice as a personal affront -- reactions range from "Why me?" to "Why wasn't I asked?" -- it's really nothing to fret about.

"People shouldn't take it personally," says Alan Jones, senior vice president for servicing at Wells Fargo Home Mortgage in Des Moines, Iowa. "It doesn't have anything to do with anything they have done. It's a standard business practice."

Wells Fargo is one of the few lenders that rarely transfers the servicing rights to the loans it originates. Otherwise, the practice is very common.

About half of all loans are sold at the time of their origination, usually by lenders who simply are not equipped to collect payments, manage escrow accounts, pay your taxes and insurances, respond to your questions, and prepare payoff statements when you sell or refinance. And most of the rest are sold later.

Why? Because administering loans has value. About one-quarter of 1 percent of the interest rate you are paying goes to the company that services your mortgage.

Of course, that doesn't make it any more palatable for many homeowners who now must mail their checks across the country instead of across town and speak with some faceless clerk in some other state, rather than the person down the street whom they've come to know and trust.

In reality, though, the change could be beneficial. Not only will you be dealing with a company that can provide the service you deserve; your new servicer may be able to offer products and services not available from the original one.

Normally, handoffs from one lender to another, even one transaction a few years back between two different lenders that involved nearly 850,000 loans, take place without a hitch. Every so often, though, either the seller or the buyer drops the ball. So you should take extra precautions to make sure that yours isn't one of the fumbled mortgages.

For starters, neither company has to have your permission to transfer your servicing. In fact, you signed a sheet of paper acknowledging your understanding that a change of ownership could occur at anytime. Still, there are rules that must be followed.

Under the National Affordable Housing Act, you should receive a "goodbye" letter from your current servicer at least 15 days before your next payment is due. The letter must state the name, address and telephone number of the new servicer, the date the old company will stop collecting payments and the date the new company will start accepting them.

Under the Helping Families Save Their Homes Act, signed by President Obama on May 20, the new owner of your loan -- which may or may not be the servicer -- must also notify you of the transfer within 30 days.

You also should receive a "hello" letter from the new servicer that outlines the same information. But if you receive only a welcome letter, your antenna should wiggle; you may be the intended victim of a scam by someone who is hoping to persuade you to mail your payments to him instead of the rightful owner of your mortgage.

If you just get the one letter from the new servicer, call the old one to verify that your loan has actually been transferred. If it hasn't, notify the authorities immediately.

Once you are certain an exchange has actually taken place, follow the instructions contained in the welcome letter. If you don't, you run the risk of the payment not arriving on time at the proper place. Worse, it might not get there at all. Remember, once you are notified of a servicing transfer, it is your responsibility to send payments to the new servicer.

If you accidentally send your payment to the former servicer, the company usually will forward it to the new one. But it won't continue to do so for long.

Often, the new servicer will send a new coupon book. But if your next payment is due before the coupons arrive, write your loan number on the check and send it so it arrives on time. Just in case, it's also a good idea to include the appropriate coupon from the old servicer. But either way, keep your own records.

If you make your payments through an electronic-funds transfer or automatic draft, you will need to cancel your old arrangement and start a new one. And since this often takes time, you may have to make your first payment to the new servicer by check.

Even if you follow the new servicer's instructions, Jones of Wells Fargo says it's always a good idea to monitor your account closely for a while "just in case there's a disconnect."

Because servicers are "highly sensitive" to the feelings of their customers and "very forgiving," Jones says that late charges are rarely assessed on new accounts less than 60 days old. If you are charged a late fee during this grace period, call and ask that it be withdrawn.

While you don't have any say when your loan is sold, the new servicer cannot change the original terms of your mortgage. Your loan number probably won't be the same. (Keep track of your old loan number in case you have any questions.) But your rate, term, payment date and other conditions must remain the same.

However, at some point after the exchange -- sometimes immediately after the switch -- the new servicer will analyze your escrow account to determine whether an adequate amount is being collected each month along with your principal and interest payments to cover your property taxes, hazard insurance and mortgage insurance. If not, your total monthly payment could go up.

If you were specifically allowed to pay taxes and insurance on your own under the old mortgage, the new servicer cannot now demand that you establish an escrow account. But if the contract was neutral on the issue or merely limited the actions of your old service, the new one may be able to require such an account.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance-industry publications.