Bad economic news tops every news broadcast with big lenders like American Home Mortgage, Geneva Mortgage, Homebanc and many more completely cease all operations. This change in the game is leaving many homeowners worried about what is going to happen to them now that their lender is KAPUT!
Do not fret... don't worry at all... in fact, get ready to make your September payment as scheduled. Just keep your eyes open for your letter regarding who will be servicing your loan from now on.
You see, many of the lenders that you are paying your monthly payments to are in fact only servicing your loan. They are not holding the note, but instead they are collecting and distributing funds for the actual mortgagee - typically an institutional investor.
A lender that holds loans is called a Portfolio Lender. Meaning that the loan is part of their investment portfolio much like we would keep stocks, bonds or a mutual fund in our retirement portfolio. Most lenders do not portfolio loans, they sell them on the secondary market instead.
The Secondary Market is made up of investors like Pension Funds, Insurance Companies, FNMA (Fannie Mae), and FHLMC (Freddie Mac). These investors have contracts with lenders to service loans on their behalf.
A lender that services loans performs certain tasks for a Portfolio Lender or Institutional Investor. These tasks are:
- Collecting Payments - the most visible function
- Collecting Escrow payments
- Maintaining appropriate Hazard Insurance - including fire, hazard, windstorm and flood
- Paying Real Estate taxes
- Collecting Private Mortgage Insurance (PMI) payments
- Paying Net Proceeds to the Investor/Lender
Other tasks that these service lenders provide that are not as evident are:
- Sending out compliance documents - like the escrow analysis forms
- Preparing Mortgage Interest Tax Deduction forms for your taxes
- Disclosing the principle and interest due and paid monthly and annually
- Dropping the Mortgage Insurance when it reaches appropriate levels
- Calculating payoff amounts upon sale
and finally... (what we're seeing so much in this market)
- Accelerating the note and foreclosing on the borrower in the event of default
- Taking title to the property and liquidating the collateral on behalf of the Investor.
So in this market when we see some big name "lenders" going under, many times they are not the ultimate mortgagee... but instead the servicing entity. Despite the servicing entity's demise, the investor will have another lender contracted out very quickly so they do not lose the revenues.
Unfortunately, there is little or no transparency in this area of the lending industry to show you who you ultimately owe your money to...
So... as I mentioned before... be ready for your next month's payment. It will be due to someone even if your "lender" shut its doors.