Friday, November 25, 2011

Why Where Your Mortgage Comes From Is Less Important Than Where It Goes...

Missed Mortgage Payments?

The Basics: Mortgage companies that sell mortgages to other lenders often do so at the peril of consumers.

Virtually everyone who has ever bought a house has a different piece of advice on what to look for in a mortgage company, but in my experience, there is one essential piece of information every prospective homebuyer ought to know going into getting a mortgage: Will your mortgage company sell your mortgage to another bank/mortgage company/lending institution? Why this piece of information above all others? Simple: too often, mortgage companies sell mortgages between themselves and the terms of your mortgage may change without your knowledge and consent.

Yes, that’s a rather important fact that many mortgage companies do not openly inform buyers of when they sign on the dotted line. For some unfathomable reason, signing on the dotted line with Company A may mean you are subject to Company B or Company C’s terms. Welcome to the big business of buying a house!

Mortgage companies are responsible for authorizing the rates and terms of a loan and on the big principles, often they cannot be changed. So, for example, the nature of the mortgage (fixed or variable rate interest) and loan amount remain consistent once you sign the mortgage papers. However, beyond that, specific terms may be altered based on company principles. So, for example, if you sign with Company A and your mortgage is due every month on the fifteenth, but Company B buys your mortgage, they can demand the payment be due on the first of the month . . . starting with the month they bought it! This can leave young homebuyers in a real crunch to maintain their house payments and confused when the companies change.

Why do mortgage companies sell mortgages they loan? Mortgage is just a fancy term for “loan for a house.” Mortgage companies, like banks, loan money in order to make more money on that investment. However, each time they loan money out, they have that much less money to attract new customers. As a result, Company A, a small local mortgage lender, might have a month where they loan to ten customers. Let’s say all of the mortgages were $50,000 fifteen year mortgages with a fixed rate of 8.2%. Company A has half a million dollars it no longer has to loan out and it won’t make a certain profit for several years. Company B, who is a multi-billion dollar company, comes along and says, “We’ll give you $520,000 for those ten loans today!” This is a great deal for Company B because over the course of the fifteen years, they’ll get in $870,516 (8.2% is a crappy loan rate!)! But this is also a good arrangement for Company A because: 1. They show a profit of $20,000 in a single month, 2. They now have their half million dollars to loan again, and 3. The risk associated to loaning to the ten people is no longer theirs.

Why should this be a priority for buyers? Home buyers are putting their entire financial future in their hands when they buy a house. It’s an investment and, like many investments, can go up or down. It provides the buyer with the greatest source of ownership in the United States, but it also carries a tremendous risk, given the home market’s cyclical nature. What mortgage companies want buyers to forget is the buyer has options!

Yes, the buyer has a choice with who they get their mortgage with. The practice of selling mortgages between mortgage companies means that you lose that choice. You can do all sorts of research on Company A and decide you like their rates, corporate philosophy, investment strategies, and personnel. In fact, you can choose Company A because you don’t like Company B and don’t trust Company C. But if Company A sells their mortgages frequently, you could end up with Company C . . . with absolutely no recourse! This is like buying a car from your friend, but when the goods get delivered, it’s dropped off by the mob or going to a four-star restaurant and sneaking back into the kitchen only to discover the “chefs” are unwrapping fast food packages and placing them on fancy plates!

How do I know all of this? I had a house, once upon a time. As a newlywed, I played the game, moved out of a family home and struck out with my partner for our own place. The mortgage company we signed our mortgage with was an exceptionally friendly local company that sent us flyers throughout the year and was so nice to us (up until the moment our foreclosure began, when they pretty much disappeared from my life). When we were buying our house, we were very casually warned that the company – which was real good at getting people authorized for a mortgage – would probably sell our mortgage and we had nothing to worry about if that happened. Within a month, our mortgage company went from being literally down the street in our village to in the next big city (about twenty miles away). But within two months of that sale, a third company bought our mortgage. From that point on, our dates for mortgage payments became more variable, there were all sorts of late payment fees associated with the account and the customer service department was literally across the country! The final mortgage company was inflexible, engaged in business practices that were shameful and when my marital situation changed, they illustrated a complete disregard for everything . . . including getting their money! I would like to think I had a worst case scenario, but in researching mortgage sales, I discovered it was exceptionally common (this is also why an Ohio Representative in Congress suggested those having problems with mortgage companies in recent years continue to squat in their homes, because many of these sales happen so frequently and without proper documentation, such that if the mortgage company cannot prove they hold your mortgage, you might not have to lose your house!).

The buyer cannot stop their mortgage from being sold to another company without explicit clauses in the actual mortgage contract. But getting such provisions put into a mortgage starts with asking the mortgage company. And if they cannot guarantee they will not sell your mortgage, keep looking; the hassle of getting a house is bad, but the problems of working with a company you haven’t researched and approved for your most important investment (which can happen with these mortgage sales!) can be far, far worse.

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© 2011, 2010 W.L. Swarts. May not be reprinted without permission.

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