Mortgage Transfers and Servicing

Couple going over complicated paperwork.

For many consumers, obtaining a mortgage is an essential step towards realizing the dream of homeownership. But the closing is just the first step in the homeownership journey and borrowers need to monitor communications should their loan be transferred.

Within a few weeks of closing, many loans are transferred to the secondary market. The secondary market is a marketplace where investors buy and sell mortgages that have been securitized.

The sale of mortgages is actually a common practice that helps lenders continue to help more consumers secure loans. Those lending activities help keep the community’s economic engine moving forward.

Most mortgages will be sold

Nearly 70% of first-lien mortgages closed in the U.S. will be sold as investments on “the secondary market.” This percentage has been increasing steadily over the last few decades and is the most common outcome for a closed residential mortgage loan in today’s market.

The secondary mortgage market is a marketplace where investors buy and sell mortgages that have been securitized or packaged into bundles consisting of a number of individual loans. Mortgage lenders originate loans and then place them for sale on the secondary market. Investors who purchase those loans receive the right to collect the money owed, referred to as “servicing.”

If the secondary market didn’t exist, mortgage rates would be significantly higher and most people wouldn’t be able to afford to buy a home.

Who buys mortgages?

Two of the largest purchasers of residential mortgage loans are Fannie Mae and Freddie Mac. Congress created the secondary mortgage market in 1938 with the formation of Fannie Mae to provide additional liquidity for originating lenders. In 1970, Congress created Freddie Mac with a similar goal. These entities buy mortgages from lenders and either hold these mortgages as investments or package the loans into mortgage-backed securities (MBS).

With the ability to sell loans to Fannie Mae and Freddie Mac, banks can write more mortgages and enable homeownership among more people. These government entities play an important role in the nation’s housing finance system – providing liquidity, stability, and affordability for the mortgage market.

Having a mortgage sold on the secondary market is not a reflection on the borrower. It is simply an efficient way to help lenders continue lending and to help keep costs down for borrowers.

Portfolio options

For most banks, a very small portion of residential mortgage loans are held “in portfolio.” Loans held in portfolio are long-term assets that tie up significant capital for the bank. Therefore, portfolio loans often come with a higher interest rate for the borrower.

Do I have the option of requiring my loan remain with my primary lender?

During the process of signing loan documents, borrowers in New York state are required to sign a Mortgage Transfer Disclosure that acknowledges that their loan may be sold. A borrower could request that their loan originator price the loan to be held in portfolio (see above), eliminating the option of sale on the secondary market. As noted, however, the rate will likely be higher.

My loan was sold to Fannie Mae or Freddie Mac with servicing retained. What does that mean?

Servicing retained occurs when banks choose to sell their loans to Fannie Mae or Freddie Mac, but will service (accept payments, manage escrow, etc.) the loan themselves. This allows the lender to keep the borrower as a customer while transferring the loan from its books.

What should I do if my loan is transferred to the secondary market?

First, don’t worry. Nothing has changed regarding the terms associated with your loan. Your interest rate, monthly payment, and remaining balance will not change. You will, however, need to be on the lookout for the notifications sent to you by our primary lender and the new owner of your loan. Pay particular attention to:

  • All the contact information the new lender has for you. Verify that everything is correct to avoid any miscommunication.
  • Save the servicer’s information in a safe place so you can contact them if necessary.
  • Look for notifications related to updating your payment process to avoid any late payments.
  • Double-check the effective dates for the changeover so you will know when payments to the old lender should stop and ones to the new servicer should begin.
  • Make sure you have copies of any previous statements and make sure you have all of your closing documents handy to ensure you can verify all the payments you make.
  • When you make your first payment to the new loan owner, confirm that it went through correctly and on time.

While it may initially come as a surprise to borrowers, lenders are more likely to transfer a mortgage to the secondary market then keep it in portfolio. If banks held all their mortgages in portfolio, they would have very little money to lend, raising costs across the board for homebuyers, retail banking consumers, and small businesses alike. The sale of mortgages is a common practice that helps banks maintain liquidity and keep funds available for people to borrow for homes, businesses, cars, a college education, and more.