You receive a letter in the mail from XYZ Mortgage, informing you that they’ve purchased your mortgage and that you’ll need to send your payments to them from now on. They assure you that the terms of your mortgage haven’t changed, and neither has your payment amount. Although you’re annoyed by the inconvenience, dutifully and on time, you send your payments to the new company at the P.O. box specified.
Three months pass, and you receive a letter from your previous mortgage company, wondering why they haven’t received a payment in three months. In a panic, you dig through your files to find the original letter from XYZ Mortgage. You find that no phone number is included anywhere for XYZ. You look in the phone book, go online, but no such company exists. You’ve just been had, and not only are you out the money XYZ stole from you, you owe that amount plus penalties to your true mortgage company. Plus all the credit companies now have emblazoned your credit report with a big, fat black mark.
What went wrong? And is there any way to get your money back, not to mention your good name? Probably not, say experts. Phony mortgage companies pop up all the time, setting up P.O. boxes, sending out official-sounding letters which name your current lender (all that information is a matter of public record and easy to dig up). They stick around for three months or so, collect payments, pull up stakes and move to another state, rarely getting caught in the process. Unfortunately, borrowers bear the responsibility here. It’s up to you to verify the legitimacy of these companies before you send off a dime.
So how do you protect yourself? It’s simple. Unless you receive a coinciding letter from your current lender, do not send off any money to a company claiming to have bought your mortgage. The law gives you a grace period of 60 days to send your payment to the new mortgage company if indeed it is legitimate. Even if you send your payment to your old mortgage company during this time, and they have to reroute your check, you cannot incur any penalties during this time, neither late fees nor black marks on your credit report.
Congress took note of these mortgage scams, and in 1990 moved to regulate the assignment, transfer or sale of mortgage loans. As part of the National Affordable Housing Act, certain provisions were added to the Real Estate Settlement Procedures Act (RESPA):
1. The lender must disclose to the borrower its policy on assigning or selling loans at the time a borrower applies for a mortgage loan. HUD has written a model disclosure statement that all federally related mortgage lenders must use.
2. If a lender assigns, sells or transfers your loan, both your current lender and the mortgage buyer must make certain disclosures, including the name, address and telephone number of the transferee, as well as the effective date of the transfer.
3. Each disclosure statement must declare that the transfer does not affect any term of the mortgage other than who’s servicing the loan (receiving the payments). So although your loan has been sold, and you must now send your payments to the new lender, the basic terms of your note and deed of trust cannot be changed. They remain in full force and effect whether the original lender holds your paper or some third party holds your documents.
So is this selling of mortgages ever a legal practice? Yes, and it’s becoming more common all the time. It’s called the secondary mortgage market. Organizations such as the FannieMae and FreddieMac purchase large packages of loans from lenders at a discount, providing the individual lender more cash available to generate new mortgage loans. Lenders depend on available cash to do business. Receiving payments from borrowers amounts to a slow trickle of money, not enough to lend to new borrowers, and if lenders run out of cash, they’re out of business. The quickest way to get more cash is to sell the loans they’ve already made.
While having your mortgage sold over and over again can be inconvenient and annoying, the bottom line is that it’s good for everyone. Why? As more lenders enter the marketplace by issuing conventional mortgages, the result is more competition, which helps keep interest rates competitive from lender to lender because consumers have more choices.
The secondary market also generates more profit by selling loans. Unlike several decades ago, most mortgages nowadays don’t last 30 years, so lenders rarely realize all the interest from a loan anyway. So by having more cash to lend, lenders can make more loans, charge more fees and generate more short-term profit.