The mortgage industry sometimes refers to as a “goodbye” letter. In essence, it’s an advance notice that a homeowner’s mortgage has been sold and transferred to another entity. For many, this might be somewhat surprising. A borrower and a loan officer form a relationship during the homebuying process or when refinancing an existing mortgage but not too soon thereafter the relationship might seem somewhat diminished. Where’s the loyalty? Why did my mortgage company sell my loan when I was happy where it was? The answer is that without the ability to sell a loan, getting a new mortgage would be made much more difficult.
Gone are the days when a mortgage company or a bank would pull money out of its vault in order to finance the purchase of a new home. Instead, lenders operate from a line of credit. When a new mortgage is approved and ready to fund, lenders tap into that line of credit. After the loan has funded, it can then sell the loan to a third party. Selling the loan replenishes the line of credit so the lender can continue making more home loans. But who does the lender sell to?
Most loans today end up being owned by Fannie Mae or Freddie Mac. When a lender approves a loan using standards issued by Fannie or Freddie, the loan “conforms” to these established guidelines and is eligible for sale. But what might strike some is that monthly payments aren’t made to Fannie or Freddie. Instead, it’s made out to another mortgage company, or more appropriately, a mortgage servicer.
A mortgage servicer is typically a division within a mortgage company or bank that gets paid a fee for handling the monthly payments on a loan. Each month, when a borrower writes a check to the mortgage company, the funds first go to the servicer and later transferred to Fannie or Freddie.
Fannie and Freddie play a crucial role in the mortgage industry when buying home loans. Without the ability to sell a loan, mortgage lending would falter. It would mean rates and fees would be higher. Down payment requirements more stringent and overall mortgages would be much more difficult to qualify for. By approving a conforming loan, it lets the lender know the loan is eligible for sale, sells the loan and continues making still more home loans.
Loans can be sold individually or “in bulk.” An individual sale is less common but still a practice. Instead, lenders commit to selling a certain amount of loans to Fannie or Freddie in advance. A lender might commit $50 million in home loans during a specific period of time to Fannie Mae, proceed to process, approve and fund those loans, later transferring the $50 million in funded mortgages to Fannie. At that point, the process starts again.
The buying and selling of mortgages in this “secondary” mortgage market provide needed liquidity in the mortgage industry. Without being able to offload mortgages, for a profit, the mortgage industry and real estate in general would suffer greatly. A “goodbye” letter is a sign of a healthy mortgage market.