Sunday July 20, 2008

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Mortgage Servicing Rights: Traded Like Baseball Cards?

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Back in the day - let's say pre-1980 - a mortgage signified a long-term relationship. A home buyer found a property, approached the bank where he probably had his checking and savings accounts, his business loan or his safe deposit box. He filled out an application or sat down and chatted informally with the loan officer about his assets and liabilities. The loan officer then attended the monthly Board of Director's meeting to recommend the borrower as a regular and credit-worthy customer. The Board voted and the home buyer was suddenly a homeowner with a 20 year bond with the bank called a mortgage. The borrower paid his mortgage every month, and maybe even held a party to celebrate burning it at the end of its 20 year term.

For one thing, the local bank probably no longer exists, bought out years ago by a financial giant with a name that highlights its non-local orientation; Bank of America, Citibank, Bank One, Wells Fargo, and so forth. For another, banks have been increasingly outsourcing mortgage origination and loan processing to mortgage companies and third party brokers, and in fact are minor players today in the actual granting of mortgage loans. For another, mortgages, which are more likely to have a 30- than 20-year duration, are regarded as commodities that both borrower and lender treasure only so long as they are the best they can get.

Refinancing now accounts for over 40 percent of the mortgage market and homeowners are forever on the lookout for better deals. Therefore it is not surprising that lenders are shopping around as well.

Written into a standard Freddie Mac/Fannie Mae mortgage package is permission for the lender to transfer the mortgage loan, an event that might happen years after the closing - or the very next day. In today's market mortgages are sold more often than baseball cards traded.

And it is no big deal. The institution or private investor which owns your mortgage, whether it or he originated it or not, is legally bound by the note, security agreement and mortgage. The rate and rules for adjusting that rate, the grace period, the instances of default and other terms cannot change once the original parties sign and agree. The new owner is stuck with them, and a borrower has recourse if those terms are not adhered to whether by Old Home Town Bank & Trust (Jimmy Stewart, President and CEO) or Scrooge McDuck's Multinational Big Bank Vault, Inc.

However, (and today isn't there always a however?) there is another aspect of your mortgage loan that is also bought and sold, and much more frequently than the loan itself; the servicing of that loan.

Loan servicing companies handle the operational aspects of mortgage lending. They collect mortgage payments, credit those payments, send reminders when payments are overdue, assess late charges, establish escrow accounts for the payment of taxes, hazard and flood insurance, and private mortgage insurance. They pay out taxes and insurance premiums when due, and account for all of the above to the investors who own the loans. They also are responsible for managing loss mitigation when a loan gets in trouble. This can include collection activities, loan workouts, and, if necessary, foreclosure. Some even manage the foreclosed property.

If you get a notice from the company to whom you have been making monthly payments that your loan is being transferred, it is likely that the ownership of your loan has not changed; just that one big mortgage servicing company has bought a portfolio of loan servicing rights from another.

There is big money in the servicing of mortgage loans and so it has become big business. A servicing company typically collects a small fraction of the monthly payments on a performing portfolio, a tiny amount per loan but a significant amount on a portfolio valued at tens of millions of dollars, particularly since there is little work involved in servicing performing loans. Servicers are now frequently sending out one year coupon payment books rather than monthly statements and the popularity of on-line payment has eliminated a certain amount of the old paper-sifting. The servicer also collects a portion of late fees and might shift into an entirely different fee structure if a loan becomes delinquent.

According to the Federal Trade Commission (FTC), you have the following mortgage servicing rights under the 1990 National Affordable Housing Act if your loan servicing is transferred:

• You must be notified at least 15 days before the effective date of the transfer of your loan servicing. Sometimes a borrower is notified at the loan closing that the loan is to be immediately transferred and in that case the 15 day period is waived. Notification must include name, address, and telephone number for the new and old servicer, date of transfer (both to and from), and a statement of any changes in terms in the servicing agreement. The latter are limited - for example, if you have not been subject to tax or insurance escrow payments with the old servicing company, the new one cannot insist on collecting such payments.
  
  It is usual for both the old and the new service to send such notification. If you receive a transfer notice only from the new servicer it is imperative that you contact the old servicer to check that the transfer is legitimate. Do this from information in your files, not through web addresses or phone numbers provided by the new servicer.



• There is a 60 day grace period in which you cannot be charged a late fee if you sent your payment to the old service. If you are charged such a fee or if you find that a credit bureau has been notified of a late payment in such a situation write to the new service immediately (a real letter, not a note scrawled on your payment bill or coupon) and follow up to make sure the late payment or negative report are removed. The FTC provides excellent sample complaint letters to both servicing company and credit bureau on its website at www.ftc.gov/becp/conline/pubs/homes/mortserv.htm.

So if seeing your mortgage sold is no big deal, why care about the transfer of servicing rights? A+. You have been paying attention. There is growing concern about the activities of some mortgage servicers. We will take a look at this in a subsequent column.