Many years ago, the mortgage industry was a lot simpler than it is today. Back then, if you wanted a mortgage to buy a home, you'd visit your local bank or savings & loan. You'd apply, and if approved, your lender would keep that mortgage on its books for the life of the loan. You'd make your payments to the same lender month after month until the loan was paid in full. It was easy and predictable.
Many mortgage lenders still operate exactly like that, for some of the mortgage loans they originate. For example, Citi keeps many of the mortgages we originate. By originate, we mean that the home buyer applied, received approval and closed a mortgage through us. By keeping the mortgage on our books we retain the servicing of the loan and process the payments the borrower sends us every month. However, the majority of mortgages originated no longer work this way.
Who buys mortgages and why?
Today, the majority of mortgages are sold to loan investors after origination. Some of loan investors will no doubt be familiar to you, such as Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) established by Congress to provide more money for mortgage originators to lend. In fact, Fannie Mae was originally created in 1938 at the height of the Great Depression, to help make home ownership more affordable for more Americans. That mission continues today.
There are private loan investors as well, which purchase pools of mortgages called mortgage backed securities (MBS). Mutual funds, pension funds and other types of private investors buy these loans with the plan to earn a fair return on their investment. Again, these purchases free up capital for the mortgage originator to loan to other home buyers.
Without Fannie Mae, Freddie Mac and private investors, there would be far less money to lend at affordable interest rates. And far fewer Americans would have the opportunity to own a home.
Servicing retained vs. released? What does it mean to me?
There are a couple of ways mortgage loans are sold to investors. It may be that your loan gets sold, but the servicing stays with the company that originated your loan, or both the loan and servicing could be sold at the same time. Here is a rundown of the two scenarios:
1. Servicing Retained: If you're still making payments to the same lender that originated your mortgage, there's some chance that your loan is still on that lender's books. But it's far more likely that the mortgage originator sold your loan to a GSE or private investor, and retained the servicing. By retaining servicing, the mortgage lender becomes the loan servicer and manages all account activity on behalf of the investor. Loan servicing includes mortgage activity such as processing monthly payments, crediting interest and principal payments, and paying taxes and insurance if there is an escrow account.
2. Servicing Released: If you originated your loan with a different lender than who you currently make payments to, then servicing was sold at some point. Servicing can be sold with the loan or it can be sold separately.
If your loan, servicing, or both are sold you will receive notice from your lender in the mail. If the servicing is sold, your current lender will provide contact information for the new servicer and information about where to send your mortgage payments. Typically, the new servicer also sends out a welcome letter as well.
Why my mortgage?
The decision to sell a mortgage is strictly a business decision. It is not a reflection on you, nor does it mean that the current lender doesn't value your business. The decision has one purpose: to make home ownership affordable for as many people as possible.
© 2011 Citibank, N.A., equal housing lender, member FDIC. Citibank, Citi and Citi with Arc Design are service marks of Citigroup Inc.
© 2011 Citibank, N.A. This is not a commitment to lend. Terms and conditions of programs, products and services are subject to change. All loans are subject to credit and property approval. Certain restrictions may apply on all programs. Offer cannot be combined with any other mortgage offer. Citibank, N. A., equal housing lender, member FDIC. Citibank, Citi and Citi with Arc Design are service marks of Citigroup Inc.