Answer Man: The business of transferring mortgages

News-DemocratMay 7, 2013 

Q. Recently we were notified that our current mortgage holder will "transfer the servicing" of our account to another firm. This is the fifth time this has happened in 10 years! Several of the companies have been well-known and several we've never heard of. What are they doing and why?

-- Jim from Belleville

A. Sounds like you're longing for the days my parents enjoyed.

Your question prompted me to dig out the Loan Account Book they received in 1942 when they borrowed $2,500 from Greater Belleville Savings and Loan Association to buy our family's home on South 16th Street.

I never fail to marvel at the times they lived in. Each monthly payment was meticulously recorded in the booklet by hand. Payments were supposed to be $25 a month, but my mom hated debt so they scrimped and saved and paid off the entire mortgage in three years, which included a whopping total of $240 in interest.

And, as was probably the custom back then, the loan remained with the Belleville S&L.

"Those times are gone," said Donald Frommeyer, president of the National Association of Mortgage Brokers, chuckling over my story from days of yore.

Now as you've found, mortgages often are batted around like a pingpong ball during their lifetime. So what's the reason? To make money and keep the economy moving, Frommeyer said.

Think about it. You're a bank that makes loans, but you don't have unlimited resources. In simple terms, the amount you can lend is limited by the amount of your deposits. So, as you reach your loan limit you can do one of two things: lay off your loan department or sell the servicing rights to your loans so you can make more loans.

Obviously, you're going to "sell the loans" and it's usually a win-win for everyone involved without affecting the borrowers, except to whom they mail their payment.

First, the seller often makes additional money, Frommeyer said. For example, large companies that do nothing but service loans (collect payments) have sprouted up, and they may pay you a premium to buy the servicing rights to your loans.

"They may pay 1 percent more than what the balance is to get something that's performing well and is at a lower risk," Frommeyer said.

The end result is that the bank has made additional profit on the loan that it originated. Plus, it has freed up space in its portfolio. Now the bank can make more loans to keep its local community happy and keep its own bottom line growing.

At the same time, the companies that buy the loans also make money from servicing them.

"It's all about collecting the payments," Frommeyer said. "For example, LSI in Florida just has a huge portfolio of servicing rights and that's how they make their money. So, their goal is to buy more and more mortgages to collect more money."

As you've found, however, some buyers are somewhat like people who "flip" homes. For example, Frommeyer said, a retirement plan may keep them only for a short time before selling them to make a few more bucks. Again, profit is the incentive.

"There's money in mortgages," Frommeyer said. "That's what my dad told me when I went into this business: 'At least you're going into something that everybody has to have.'"

Of course, we've all heard the nightmare stories from the real estate industry the past few years. In this case, mortgage holders may sell underperforming old loans at a loss so they free up portfolio space for new loans that are less risky and, most important, profitable.

Admittedly, it can be jarring for the borrower. I know the surprise I felt when I went to the trouble of getting a mortgage from a local bank -- only to be notified within weeks that it had been sold to an international financial company.

But it apparently keeps lenders happy and the economy moving. So, as long as you're up to date in payments, it doesn't make a whit of difference. It in no way reflects on your credit, and, by law, terms of the loan cannot be changed.

"It just happens," Frommeyer said. "That's how the economy works."

Today's trivia

What 1960s sitcom was based on Marie Teresa Rios' book "The Fifteenth Pelican"?

Answer to Tuesday's trivia: So he could treat everyone to one of his favorite snacks, Ronald Reagan had three and a half tons of red, white and blue Jelly Bellies (which trace their origins to Belleville) purchased for his 1981 presidential inauguration. It was a habit he started in 1967 when he started eating jelly beans to help him quit his pipe-smoking habit, according to the Reagan Presidential Library archives. When Jelly Bellies came along in 1976, Reagan made a quick switch.

Send your questions to Roger Schlueter, Belleville News-Democrat, 120 S. Illinois St., P.O. Box 427, Belleville, IL 62222-0427 or rschlueter@bnd.com or call 239-2465.

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