When the company collecting your mortgage payment changes, many homeowners mistakenly believe their entire loan has been sold, but technically it’s only a transfer of the “servicing rights” that occurs. During this transfer, only the entity collecting the payments changes, not the owner of the mortgage debt. The mortgage debt itself is retained by either Fannie Mae, Freddie Mac, or Ginnie Mae, the government-sponsored enterprise (GSE) that initially purchased the mortgage debt from the original lender. CLICK HERE for more information on the role of the GSE’s and loan servicing.
During a servicing transfer, the terms of the original loan cannot be changed under any circumstances. Any funds held in escrow by the original servicer must be transferred to the new servicer. The only change is the servicing company and the payment address.
There are several reasons why a loan servicer may transfer the servicing rights of loans to another servicer. One such reason is to raise immediate capital to ensure compliance with various regulatory requirements. Under the current banking regulations, servicers must maintain specific financial reserve levels based on the number of loans they service. If they find themselves servicing an excessive number of loans with insufficient reserves, they can quickly increase their reserves by selling the servicing rights of loans within their portfolio. The buyer of the loans recognizes the future value of collecting payments on them over time and is therefore willing to pay a small premium upfront in anticipation of greater earnings over time.
Many homeowners’ express frustration when their loan servicing is transferred from one servicer to another. This frustration largely arises from the surprise of the transfer and a lack of verbal communication from the servicing companies. Servicers are required to adhere to strict protocols when a transfer occurs and must always convey the news to the borrower in writing, but these letters are often misplaced or remain unread.
One of the most common complaints arising from servicing transfers revolves around failing to update the Loss Payee clause of the insurance policy to reflect the new servicer’s name. When a servicing transfer occurs, the former servicer notifies the insurance company and requests the policy be updated to reflect the name of the new servicer. However, many insurance companies will not make changes to policy documents without the homeowner’s permission. If the policy is not updated, the insurance company might mistakenly send the renewal invoice to the former servicer leading to cancellation of the policy for non-payment.
While this issue can be resolved afterward, it’s a significant source of frustration that can be easily prevented by reaching out to your homeowner’s insurance agent and confirming that the Loss Payee clause of the policy has been updated to include the new servicer’s name.
Author: Informed Mortgage Team
