Back in the old days (when the Boomers were worried about turning 40), if you got a loan to buy a house, yousent the monthly payment to the people downtown who held your mortgage in their vault.
Not any more. While many consumers have detected the disembodied nature of modern “lenders”, very few havefigured out that the people to whom they send their house payments don’t own the mortgage.
Since the 1980’s, after closing, your retail lender transfers your loan to a wholesaler (which may be a captive ofthe retailer, or vice versa, or independent). Then, at the wholesaler or at an investment bank (the next level up-Merrill, Goldman…) your loan will be transformed- glommed with thousands of others into a “mortgage-backedsecurity”, then sliced and diced into zillions of easily traded pieces (“derivatives”), and sold all over the world.
There are exceptions- the occasional surviving S&L; making special purpose adjustable rate loans; and the bankmarket for home equity lines of credit and second mortgages.
In the case of the most common mortgages — Fannie/Freddie 30- and 15-year, most ARMs, FHA, VA, — theloan and the payment are usually pre-disconnected, weeks before closing, when the interest rate is locked and thepath from retail to Wall Street determined.
The outfit that sends you the coupon book is only a conduit for your money, forwarding it to the millions ofholders of the zillions of pieces of loans. This forwarding is done for a fee- .25-.50% of the outstanding balanceon your loan each year. It’s a small percentage, but real dough- on a $200,000 loan, maybe $5,000 during theloan’s six-year average life.
To earn that kind of money, the forwarders have duties beyond forwarding- make sure your taxes and insuranceare paid, collect late payments, and foreclose on you if you quit paying altogether. The industry name for acollector/forwarder is loan “servicer”. They provide service all right, but only to the people who pay them- theholders of the zillions of pieces of loans. (By the way, mortgage servicers are indistinguishable from theservicers of student loans, which go into Sallie Maes, serviced — badly — by Unipac, et.al.)
A mortgage servicer’s idea of service to you includes hatfulls of mail offering bad insurance; weird deals whereyou pay them $300 to take your payments twice as often; and, above all else, no human beings to answer thetelephone. Servicers are the HMOs of the financial world- if you stay on hold long enough, you’ll stop worryingabout your problem, or forget why you called.
The servicer’s role in the who’s-doing-what-to-whom of modern mortgages can be downright insidious. Forexample, the worst credit problem to have on your record today is a late mortgage payment. One in the last year,and you’re dead at most A-quality lenders. Why? Your loan could be a pain to service.
Servicing economics drive the whole, non-Wall Street, consumer and wholesale end of the mortgage business.For example, mortgage retailers don’t make money by making loans; retailers make their living by sellingservicing rights to wholesalers for lump sum fees.
The wholesalers are in the mortgage business solely to acquire servicing rights- as the loan screams through thewholesaler on its way to Wall Street (together with any points and “origination fee”), the wholesaler scrapes offand retains the servicing right and future income.
The mortgage department at many banks exists only to help the mother bank acquire servicing a little cheaperthan the bank could buy it from independent retailers. When a bank says “We don’t sell our loans”, they meanthe servicing; the loan disappears into a zillion pieces along with all the rest.
Servicing has its own post-closing secondary market. If you think your loan got sold two years after you got it,it wasn’t the loan- the servicing right got sold to another servicer. The loan was long gone.
Though terrible about phone calls, most servicers do a much better job now than at the end of the 1980’s, whentens of millions of loans from defunct S&Ls were dumped into the system. However, If you ever havetrouble with your servicer, call the retailer where you got the original loan. Retailers speak servicing jive, andhave a trick or two around the phone trees to humans.