It happens all the time. Someone takes out a mortgage with one financial institution and a few years later, the bank sells the debt to another entity. While this is common practice, you may be wondering why banks sell mortgages.
While it is legal for a bank to sell your loan, they cannot change your interest rate (unless you have an adjustable-rate mortgage), payment amount, or loan type. The only thing that will change on your end is to whom you send your payments.
Why was my loan sold?
There are two major reasons a bank might sell your loan, and neither of them have anything to do with you. The first and most obvious reason is they can make money off the sale. Before deciding whether to sell your loan, the bank will consider a number of factors, including how much they will receive from you in interest, how much it will cost to originate the loan, how much they could receive for your mortgage on the secondary market, how quickly they think you will pay back the loan, and the amount they must pay their depositors. If they decide they will make more by selling your loan than they would collecting interest from you, they may choose to sell the mortgage.
The second reason is a bit more complicated. Lenders might also sell your mortgage to free up more capital. To originate a new mortgage, lenders need money. Since most mortgages have 30-year terms, a bank would have to wait 20 or 30 years for you to pay down your mortgage before extending a loan to someone else. When your mortgage is sold, generally to a government-sponsored enterprise such as Fannie Mae or Freddie Mac, your lender frees up more credit lines and allows them to lend funds to other people. While we may think of banks as having an endless supply of cash, they actually need to have massive amounts of money to lend to consumers.
What happens if my loan is sold?
Your financial institution will notify you when your mortgage is sold, and the new owner must notify you within 30 days of the transfer. When the new bank contacts you, they should provide their name, address, telephone number, the date of transfer, and information about whether the transfer of ownership has been recorded in public records. You will want to review this information carefully and verify that the new mortgage holder has the correct information about your loan, including the balance due, payment amount, interest rate, etc.
What happens if there is an issue?
Your old and new lender are legally bound to provide you written notice if your mortgage is transferred. If you do not receive notification, there are a few steps you can take. First of all, if you mail a payment to your previous servicer, and they send it back to you, contact them to find out who is now servicing your mortgage. Make sure you document the date you sent the payment and the day you received the returned payment so you can pass this information along to the new servicer. You have a 60-day grace period when your mortgage is transferred, so you should not incur any penalties or late fees. But it is good to remain in contact with your lenders to cover yourself.
If you are not notified of the sale, you may also want to consider contacting the Consumer Financial Protection Bureau (CFPB) and filing a complaint. Not only can the organization protect your financial interests, they also track these complaints and make policy decisions to protect all consumers.