A frustratingly common complaint from borrowers has to do with loan servicing.
It is so frustrating because we often have so little control over the process.
LOAN SERVICING
Per Investopedia, loan servicing includes sending monthly payment statements, collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow funds), remitting funds to the holders/owners of the mortgage, and following up with any delinquencies.
Loan Servicers make profits by collecting a small fee with every payment, equal to about 0.25% to 0.50% (divided by 12 months) of the remaining balance of the loan.
So, if the remaining balance is $500,000, the servicer will get to keep 0.25% x $500,000/12 months = $104.
Loan servicing might seem lucrative but it is a risky endeavor that relies on volume and economies of scale.
It gets particularly risky during economic downturns because pursuing delinquent payments can get expensive in a hurry.
In addition, the fees and profits get thinner as loan amounts fall. So servicers do everything they can to keep costs as low as possible, and this is what fosters so many complaints.
SERVICERS NOT THE SAME AS LENDERS OR MORTGAGE HOLDERS
One of the things that sometimes confuses borrowers is the fact that servicers are often separate entities from the mortgage holders or the investors that buy mortgage loans.
When a mortgage bank funds a mortgage it has to sell the loan at a premium shortly after funding in order to make money.
When mortgage banks sell their loans, however, they can hold on to the servicing themselves, sell the loans with the servicing rights, or sell the loans separately from the servicing rights.
A mortgage bank might want to hold on to the servicing because it might want to make money itself from the servicing fees.
But, many mortgage banks choose to sell servicing rights because doing so can be lucrative and generate a lot more cash upfront (vs. waiting for the fees to roll in).
FIRST PAYMENTS – CONFUSION RIGHT AFTER FUNDING
What further adds to the confusion is “First Payment Letters or Notices.” When mortgage banks first fund loans, they sometimes have to collect the first payment themselves before the loan is formally sold to another investor.
Because of this, mortgage banks typically send out “First Payment Letters” to borrowers that explains this.
Confusion arises when borrowers also get notices from their new servicer after the loan is sold.
The important thing to note though is that mortgage banks and investors are usually pretty good at sorting these things out.
Borrowers are usually OK from a credit perspective – whether they make their first payment to the funding mortgage bank or the new servicer after the loan is sold.
SUB-SERVICERS
Adding additional confusion to the mix is the use of “sub-servicers.” These are firms that specialize in servicing that handle the administrative side of things on behalf of mortgage banks that retain servicing.
Our mortgage bank uses a firm called Dovenmuehle.
WE OFTEN HAVE NO CONTROL OVER SERVICING
While our mortgage bank does retain some servicing, it either opts to sell or is forced to sell servicing rights in many cases, depending on loan type.
Jumbo investors, for example, typically demand servicing rights along with the loan.
Borrowers sometimes come to us and say something like this…”we want to refinance but we definitely do not want to endure ‘such and such’ servicer again b/c they were so awful…”
While mortgage banks can sometimes avoid servicers with particularly poor reputations, they more often than not have no control over who ends up handling the servicing.
This is particularly the case when servicing rights get sold or transferred more than once after a loan is sold.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
