You might be wondering what mortgage investors have to do with you when you buy a home. The truth is, mortgage investors keep the real estate market running in ways you probably didn’t even realize – and in some cases, they can impact the servicing of your current mortgage.
Most mortgage lenders opt to sell your home loan at some point during your mortgage term, so you’ll want to understand how this process works. We’ll explain more about mortgage investors, how home loans transfer and what this means for you as the mortgagor.
How does mortgage servicing work and who is involved? Broadly speaking, mortgage servicers work with four types of loans. The most common loans are backed by the government-sponsored enterprises, namely Fannie Mae and Freddie Mac, and are called GSE loans. Government loans are backed by the government, portfolio loans are kept by private lenders on their balance sheets, and private-label securities, or PLS loans, are purchased by private investors.
Since the housing crisis, PLS loans have become a tiny portion of the market, and because portfolio loans resemble GSE loans in many aspects, we focus on government and GSE loans, as they constitute the bulk of today’s mortgage loans.
In addition to the servicer and the homeowner, the mortgage servicing industry consists of five key actors. Each of these five parties makes critical decisions that determine how a loan is serviced.
First, there is the lender. After the loan is closed, the lender decides who services the mortgage. Generally, there are two ways for the lender to set up mortgage servicing:
- The lender decides to service the loan itself, in which case the lender is also the servicer. When this happens, the homeowner makes monthly payments to the lender.
- The lender can sell the right to service the mortgage to another entity, in which case the homeowner makes monthly payments to that entity, which becomes the servicer of record.
Homeowners do not get to select who services their mortgage after they close the loan. Nor do they have a say if the loan is transferred and the loan servicer changes. Confusion and delays in recording and posting borrower payments can arise when the servicer sells or transfers its servicing rights to another servicer.
Next, there are the insurers and guarantors. Often, the most important players are the insurers and the guarantors. Insurers and guarantors differ slightly, but their general role is the same. They offer protection that the owners of the loans will be paid the principal and interest, even if a homeowner does not make the monthly mortgage payment.
Guarantors and insurers create guidelines that servicers must follow, including guidelines for assisting homeowners who fall behind on mortgage payments. These guidelines often, but not always, give the servicer limited discretion in dealing with the borrower and are usually considered the industry standard.
So who are these insurers and guarantors?
Two federal agencies—the Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA)—insure nearly one-fourth of new mortgages used to buy homes in the US.
The GSEs—Fannie Mae and Freddie Mac—guarantee nearly half of new mortgages. A third federal agency, the US Department of Agriculture (USDA), also insures a small portion of loans.
And six private mortgage insurers provide additional insurance to some loans guaranteed by Fannie Mae and Freddie Mac.
Then, there is the investor. The investor is the person or entity that owns the loan. Sometimes the investor is the original lender who keeps the loan on its balance sheet, in which case it establishes the rules for servicing the loan. The majority of the time, the investor owns a mortgage-backed security that is insured or guaranteed by a GSE, the FHA, or the VA. In such instances, the insurer or the guarantor sets the servicing guidelines. For a small section of the market, the investor owns a PLS. The servicing guidelines for PLS vary widely depending on the terms of the security’s governing documents.
Finally, there are the regulators. State and federal regulators oversee different aspects of the mortgage finance system. This oversight ensures that servicers comply with consumer protection laws and regulations and that market players are financially stable.
Several federal regulators play oversight roles. One federal regulator, the Consumer Financial Protection Bureau, watches out for consumers’ interests. Others monitor the health of the overall mortgage market, and others oversee specific financial institutions, insurers, or guarantors. Some lenders and servicers are regulated by state entities as well.
State legislatures and sometimes state courts set the rules for foreclosures. In some states and cities, these rules include mediation requirements, which are put in place to avoid foreclosure if possible.
The investors, insurers, guarantors, and regulators make the rules for how servicers work with homeowners. The servicers are then responsible for understanding and following all of these rules and for helping homeowners when they run into trouble paying their mortgages.
In practice, this means servicers are legally accountable to multiple stakeholders: investors, insurers, guarantors, and regulators. Servicers must also comply with consumer protection requirements.
What Is A Mortgage Servicer?
Mortgage servicers collect homeowners’ mortgage payments and pass on those payments to investors, tax authorities, and insurers, often through escrow accounts. Servicers also work to protect investors’ interests in mortgaged properties, for example, by ensuring homeowners maintain proper insurance coverage.
If homeowners fall behind on their payments, the servicer’s role is to work with the homeowner and help them get back on track. If that is not possible, the servicer pursues a loan modification (if the homeowner is eligible) or explores an alternative to foreclosure, such as a short sale or deed in lieu of foreclosure. If a foreclosure is unavoidable, the servicer initiates the foreclosure process and manages the property until it can be appropriately transferred or sold.
Effectively servicing a mortgage loan is important for supporting successful and sustainable homeownership and includes the following:
- Processing and crediting homeowners’ payments accurately and on time
- Building a relationship with customers and being a key point of contact for resolving problems, should hardships arise
- Communicating with homeowners early when payments are missed to help the homeowner avoid falling further behind
- Working with delinquent homeowners to determine if they can afford to stay in the home
- Ensuring homeowners know all their options if they fall behind, such as a loan modification, short sale, or deed in lieu of foreclosure
- Helping with options for a graceful exit in instances when the homeowner can no longer pay the mortgage and needs to leave the home.
- Being one of the first communication points for homeowners in communities affected by natural disasters or economic troubles and helping homeowners navigate the claims process with home insurers
Servicers may also play an important role in neighborhood stabilization and revitalization.
If homeowners can no longer pay their mortgages and must leave their homes, servicers are responsible for a process called property preservation. Property preservation ensures that the lawn is mowed, the house is maintained, and the property is cared for, even if the home is vacant. By ensuring that the property does not look abandoned or run down, property preservation helps maintain property values in neighborhoods experiencing foreclosures. Also, properly maintaining vacant homes helps keep neighborhoods safe.
Finally, servicers are often responsible for ensuring that municipalities receive the tax income they are due by forwarding borrowers’ property tax payments directly to the proper authorities. This amounts to billions of tax dollars collected and paid.
What Is A Mortgage Investor?
After you buy a home, there are two main parties you’ll need to be aware of – your mortgage lender and your servicer.
Your mortgage lender is the bank or other financial institution that issued your mortgage. Your servicer is the entity that handles your home loan payments after closing. Sometimes these entities are the same, but other times, your lender will direct you to a third-party company that handles loan servicing for them.
A mortgage investor is the party that purchases mortgages from lenders. In most cases, these investors are actually government entities or government-sponsored enterprises that purchase your home loan so your lender is able to continue selling new home loans.
For instance, if your lender maxed out all of their funds this year on 30-year fixed-rate home loans – mortgages that would be paid off over 30 years – that would mean all of their investments would be tied up or on hold for three decades. In order to keep issuing new home loans, they sell mortgages to mortgage investors.
The sale of your loan doesn’t impact the collection of payments, so when your loan is sold, you shouldn’t notice a difference from a practical standpoint. You’ll keep making your payments to your servicer, which may or may not be your original lender.
There are two main types of mortgage investors that might pick up your home loan – government-sponsored entities and government agencies. We’ll explain the difference below.
Government-Sponsored Entities
Some mortgage investors, like Fannie Mae and Freddie Mac, are government-sponsored entities.
Fannie Mae and Freddie Mac have their own selection of conventional home loan products. Conventional home loans are mortgages that are backed by a private financial institution or investor instead of the government. The interest rates are similar to and sometimes lower than loans backed by government entities. There’s also a lot of flexibility in these products to match up with unique financial goals.
When either of these two entities purchases mortgages, they sell them to private investors as mortgage-backed securities. As you continue to pay on your home loan, Fannie Mae and Freddie Mac use this money to pay back the investors who purchased their securities.
When private mortgage investors invest with Fannie Mae or Freddie Mac, they are not guaranteed a profit. Mortgage-backed securities often consist of as many as 1,000 loans or more. Still, if enough people don’t make their payments, the return on investment can be substantially lowered.
Government Agencies
There are also government agencies that purchase mortgages that meet their investor guidelines. These agencies include the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA) and the United States Department of Veteran Affairs (VA).
These agencies can all purchase home loans from lenders that meet their individual agency guidelines and resell them on the secondary market to private investors. This allows these agencies to receive instant funds from investors on your loan, which in turn lets them continue to purchase more mortgages.
Why Do Lenders Sell Mortgages?
Most people don’t realize that the secondary home loan market plays a huge role in keeping the mortgage industry thriving. This secondary market purchases mortgages and makes money as you pay off your home.
Home loans are sold regularly for two reasons. The main reason is to allow lenders to afford to lend money to new home buyers. It’s common practice to sell mortgages so that lenders can get more money to help finance additional mortgages. The process is cyclical and continues from there.
When lenders sell loans, they’re able to take this debt from their balance sheet and free up their credit for new customers.
The second reason lenders sell mortgages is to provide the lender with instant funds. Your lender might earn tens of thousands to hundreds of thousands of dollars off of your home loan in interest, but they’ll need to wait 15 or 30 years – or the length of your mortgage – to receive their funds. Sometimes lenders prefer to make a faster profit by selling off your mortgage to an investor.
You can find out if your mortgage can be sold by consulting your loan paperwork. Your lending agreement or mortgage contract will detail in fine print whether your home loan has the option of being sold to another investor.
For more information on Short Sales contact us at:
Phone: 833-534-0614
Email: info@significashortsales.com
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