You search for the lowest mortgage rate. You spend weeks giving your mortgage lender the required documentation. You get through your closing and think you're done. About a week after closing, most buyers get a letter from their lender introducing a mortgage servicer who you're to mail your mortgage payments. But who is this?
You expected to continue working with your mortgage lender and that was true years ago. Those days are gone. Now you should expect the following to happen within weeks of closing:
- My last mortgage was sold to two servicers in the first 6 months I had the loan.Majority of loans are sold to government-sponsored enterprises (GSEs listed above). Theses companies buy mortgages from lenders to hold or repackage as mortgage-backed securities they sell on the secondary market.
- Most lenders also sell the servicing for their mortgages to one of the hundreds of companies (partial list below) who provide these services.
So let's review in more detail, the responsibilities of mortgage servicers versus mortgage lenders.
What Mortgage Lenders Do for You
Mortgage lenders are banks, credit unions, non-bank lenders and mortgage brokers that offers and underwrite home loans. Every lender has borrowing guidelines to verify your creditworthiness and ability to repay a loan. Mortgage lenders set the terms, interest rate, repayment schedule and other key aspects of your mortgage.
- Lenders provide estimated closing costs following an initial discussion or loan application.
- Mortgage lender's set the interest rate and maximum loan amount you can borrow based on a review of your financial documentation.
- The lender orders a home appraisal to make sure the house you want to finance is worth the money being loaned.
- At the closing, the lender funds the mortgage making up the difference between your down payment and the price of the house plus closing costs.
- Mortgage lenders then sell your loan and servicing for the loan to government sponsored enterprises and … mortgage servicers, who often are in place to collect your first monthly payment.
What is a Mortgage Servicer?
A mortgage servicer is any financial business specializing in servicing loans. It can be the same bank (national of community) or credit union that originated your loan. More often though, lenders focus on the lending process and leave servicing the loan after closing to other companies.
Here are the responsibilities of your mortgage servicer. You'll interact with them online and by phone, so you want a company that is committed to good customer service.
- Processes loan payments (principal, interest and escrow).
- Respond to borrower inquiries, especially when there are problems paying.
- Keep track of principal and interest paid.
- Manage your escrow account if you have one, paying property taxes and homeowner insurance policies when due.
- Initiate foreclosure under certain circumstances.
Which Servicers Do the Best Job?
According to Forbes, there are small servicers who handle thousands of loans and much larger mortgage services with millions of loans in their portfolio. The larger servicers handle about 75 percent of all mortgages, including most of those owned by Fannie Mae, Freddie Mac or Ginnie Mae. The challenge for borrowers is they have no choice as to who will service their loan and there are some really bad mortgage servicers out there.
You'll spend two to three months working through the home financing process with your mortgage lender and most you won't even see at the closing. You'll spend years, sometimes twenty or more years working with your loan servicer who you didn't pick. The reality is most years you should only interact with them twice:
- In January, you should get a 1098 mortgage interest statement for taxes, reporting the amount of interest and related expenses paid on your behalf during the tax year.
- Once a year you should also get an escrow analysis statement that will support their request to raise your monthly mortgage payment.
That all depends though on which mortgage servicer you end up with. Here are some of my personal experiences that you don't want to experience:
- Monthly marketing pitches for insurance, accelerated mortgage payoff and more. Fortunately it's easier to automatically move unwanted emails to trash versus earlier monthly snail mail.
- Being told I needed flood insurance when the FEMA maps said my house wasn't in a flood zone. This was a four month nightmare until I got my letter from FEMA proving I was right, at which point they had to return money stolen from my escrow account (read: Flood Insurance Nightmare).
- Dealing with a homeowner insurance claim where the loan servicer wants to dictate how you repair your home. They add more more hurdles without taking time to understand your claim or what's involved in home renovations (read: Talking to Your Insurance Company After a Flood).
Your monthly mortgage statement should tell you who your loan servicer is. If you don't have a statement, you should be able to search the Mortgage Electronic Registration System (MERS) database by entering your name and property address. However, I tried doing this and it couldn't find my house?
PS After writing this article, I discovered that more credit unions are moving to outsource their mortgage processing. Here's an article for those who want more info, More Credit Unions Outsource Mortgage Servicing.