Where Does My Loan Go?

Where Does My Loan Go?

It’s interesting to start a conversation with a person who recently refinanced their home or financed the purchase a commercial building through a bank. As outsiders, they perceive the mortgage industry as a variety of banks, which compete to put loans on their “books” and then make money from interest payments. As straightforward as it sounds, this is not the way that it happens, whether for the largest or smallest of banks. A real estate loan is just like a draft pick–they can be bought, traded, exchanged or sold to the highest bidder to fit an owner’s portfolio at any given time. Accordingly, loans find themselves in some of the weirdest places within weeks of closing. Let me explain by taking a brief snapshot of the life of a loan.

Lending houses like Bank of America, Wells Fargo, US Bank, and others spend millions of dollars on advertising how they want to originate your loan, and they really do. However, they don’t want to own your loan. Prior to a loan closing, the underwriting department has already made a determination that a borrower’s loan can be sold to Fannie Mae or Freddie Mac (also known as a Government Sponsored Entity – GSE). At closing, before the ink has dried on the documents, a bank or mortgage company’s secondary department prepares the loan for sale to Fannie, Freddie, or one of its other investors (in the case of residential loans), while insurance companies or investment funds of various sorts are options for commercial properties. As such, within one month of closing, a borrower will receive a “change of servicer” letter stating that they need to make their payments to XYZ company on a go-forward basis. However, this isn’t the new lender. This is just a new servicer (we’ll come back to that).

Fannie and Freddie have their own mechanisms in place, which allows them to put together similar residential loans in the pooling process. In multi-million and some times billion dollar blocks, they will group together loans for properties of similar types, LTVs, and FICO scores, get them scored by a ratings agency such as Standard and Poors or Moodys, hire an investment bank such as Goldman Sachs for distribution and turn massive amounts of mortgages into everyday bonds that can be tracked in the financial pages like any other bond. Often, the big money center banks such as Wells, BofA, or Deutsche Bank will hold onto a mortgage for a longer time period, but their intent is to pool mortgages together and sell them off as mortgage backed securities. Their goal is to make money off the spread, collect fees, potentially keep the servicing in-house and use the fund proceeds to make more loans, thus restarting the process all over again. (As a side note this process can be done with any predictable payment stream such as auto loans, equipment loans, and credit card receivables). Other investment companies and hedge funds participate in this perpetual cycle of funding, booking, flipping, and recycling of mortgage dollars to create a trillion dollar money making machine that literally spans the globe (as many unsuspecting residential borrowers learned first hand between 2007 and 2011).

As mortgagees started to default on their home loans, they sought relief anywhere they could. Accordingly, many borrowers went to their lender to work out a ‘loan mod.’ Unfortunately, Wells, BofA, and US Bank haven’t owned their loans since two weeks after closing. They may get a mortgage statement indicating that they can send their payment to the bank, but the end recipient and true owner of the loan could be an hedge fund based in the Cayman Islands (true story), a pension fund based in Texas (true story) or an investment house in Switzerland (yet another true story). Therefore, just because Wells mails the borrower a statement, chances are they don’t own the loan. If you fall on hard times and default, BofA is probably the master servicer that will start proceedings against you. However, they are a fee collector and not a titleholder. In fact, the only way to know who really owns your loan is to call your servicer’s (US Bank, Wells, etc.) customer service department and ask the point blank question “who owns my loan” and then they should disclose this information. It could very well be that the owner of your loan has some far-flung name like the GS-2011-14395 RECEIVABLES TRUST.

In summary, just because your loan starts at the corner of Main on Main does not mean that it ends there; most likely it doesn’t. Your best bet is to believe that a fund with a lot of money purchased its slice of the pie of your piece of the American dream in the form of a collateralized debt obligation. Like cattle and professional athletes, loans can be bought and sold at a moment’s notice to the one that feels that the loan(s) will produce the best yield. In the end, your loan’s “home” isn’t permanent so don’t take it personal if you receive multiple change of servicing notices, its just business.

 

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at howardpr@rosecityrealtyinc.com.