With all the turmoil in the mortgage industry these days, a number of our readers have been wondering what happens if their mortgage lenders go belly up. Will the terms of your loan change? Will you have to renegotiate the loan with another lender? Well, most of what goes on in the secondary mortgage market is a mystery to most homeowners. Usually that’s fine, because you probably don’t care who holds the loan, as long as it doesn’t affect the terms you agreed upon in the first place. Well, since lenders have been dropping like flies lately, it’s pretty understandable to be a bit worried, or at least wonder what’s going to happen if your lender takes a nose dive, so let’s take a look.
After You Sign the Papers
We’ve covered the mortgage process a bit in the past, but we’ll give you a quick refresher here. In many cases, soon after a borrower signs his or her loan documents the loan is sold to investors on the secondary mortgage market. This happens more often than most people realize, in fact, even if you’ve got a loan with a major company like Wells Fargo or Bank of America, those lenders may still opt to sell the loan to investors.
When Mortgages Are Sold
Now, when mortgages are sold, generally they’re split into two major parts.
First is the actual mortgage itself, which is bundled with a bunch of other mortgages and sold to an investor in the form of bonds or some other investment vehicle. When you make a payment to the company servicing your loan (covered in the next paragraph), that company takes a small percentage and pays the rest to the investor. So, while you’re making monthly payments, the investor is receiving them, after the servicing company takes its cut.
The second part of the mortgage that is sold are the servicing rights. This is the portion that, if you’ve ever had a mortgage, you’re more familiar with (more so than you probably think at least). Servicing rights grant a company the right to handle, well, the servicing of your mortgage. Whatever company you’re making payments to is the company that holds the servicing rights to your mortgage. That company takes a small cut, usually around 0.25%-0.5% of the monthly payment in return for handling all the administrative tasks that come with servicing your loan, like sending out statements, collecting past due payments, etc… After that, the rest of the monthly payment is sent to the investor who bought the investment vehicle your loan is bundled into.2
What If Your Original Lender Goes Bankrupt?
If the lender who you got the loan through originally goes bankrupt, you may not even know about it. If that lender sold off both the mortgage and its servicing rights, you wouldn’t even be making payments to them anymore. They’ve essentially taken themselves out of the loop entirely this way.
Some of the larger companies will keep the servicing rights and sell off just the mortgage as an investment vehicle. If your lender goes bankrupt after this happens, the lender will be forced to liquidate its assets, in other words, it has to sell the servicing rights to someone else. Since we’re talking bankruptcy here, those servicing rights will generally sell at a discount and, in many cases, people/companies will be fighting tooth and nail to get to purchase those servicing rights. Once a deal is struck, the biggest change you’ll notice is that the company you send payments to will change. Most homeowners have had their mortgage servicing rights sold at one point, although it doesn’t always mean their lenders went bankrupt.
What If the Servicing Company Goes Bankrupt?
If your original lender sells off both the mortgage, as well as its servicing rights, you’ll have to start making payments to the new servicing company. Now, what if that company goes bankrupt? Same as above…that company will be forced to liquidate its assets, of which your mortgage servicing rights are one of those assets, and those rights will be sold at a discount to another company or investor, at which point you’ll have to start making payments to yet another new company.
What If the Investor Who Bought Your Mortgage Goes Bankrupt?
Now that we’ve covered the servicing side of things, what if the investor who bought the actual mortgage itself, as some sort of investment vehicle, goes bankrupt? Well, that’s just like if you bought some stock in a company and then you had to declare bankruptcy; you might sell the stock to someone else, or you might lose it in a lawsuit, either way, the company who’s stock you own isn’t really going to be affected. Likewise, if the investor who bought your mortgage goes bankrupt, you likely won’t even know about it.
Will the Terms of the Mortgage Change?
No. No matter what happens, no matter how many times your loan is sold or how many companies holding it go bankrupt, the terms of your mortgage will never change. Now, you may have to start making payments to a new company, and that can be a bit of a hassle, especially if it happens several times, but your 5.5% 30-year fixed (or whatever) will stay a 5.5% 30-year fixed.
Why All This Buying and Selling Mumbo Jumbo?
So, the question still remains, why are there all these companies that handle these different aspects of your mortgage? Aren’t they all middle-men jacking up the cost you ultimately pay for your home? Well, no, and we don’t want to leave you hanging, but that’s a topic for the next article here at Truthful Lending.