The primary parties involved in residential mortgage servicing are the lender, investor, and servicer.
- The lender. The "lender," sometimes called the “originator,” is the bank or mortgage company that provides the loan to the borrower in the first place.
- The investor. Typically, an originator won’t keep the loans that it makes. Instead, lenders often sell their loans to other banks or investors, like Fannie Mae and Freddie Mac, on the secondary mortgage market. The new owner of a loan is typically called an “investor.”
- The servicer. A "servicer" handles the daily management of loan accounts. Sometimes, the party that owns the loan (called the "holder") also services it. In other cases, the holder sells the right to service the loan to a different company. (Other times, another party known as a "subservicer" handles the servicing.) Servicing rights are often bought and sold, separate from the underlying loans. The servicer could be a bank or a nonbank servicing company.
You should understand who owns your mortgage loan and which company services it. To find out why this distinction is important, read on.
The Lender or Investor Chooses the Servicer
The Servicers Handles Borrowers’ Mortgage Accounts
The primary functions of a mortgage servicer include:
- Collecting borrowers’ payments. The servicer collects payments of principal and interest from the borrower on behalf of the loan owner. Also, some borrowers have to pay private mortgage insurance (PMI), which reimburses the lender if the borrower defaults on the loan, but the home isn't worth enough to entirely repay the debt through a foreclosure sale. Servicers also collect and distribute PMI premiums.
- Handling borrowers’ escrow accounts. A borrower’s mortgage contract sometimes allows the holder to collect money, normally on a monthly basis, to cover the cost of paying real estate taxes and homeowners’ insurance for the property. This money goes into what’s called an "escrow account," and the servicer (again, on behalf of the loan owner) pays the tax and insurance bills when they become due.
- Communicating loan information to borrowers. The servicer is responsible for sending the monthly billing statements to borrowers, contacting borrowers who are late in making payments, answering borrowers' basic questions about their accounts, and sending payoff statements to borrowers who ask for one.
- Maintaining the property when needed. If a borrower stops making the mortgage payments and abandons the home, the servicer must ensure that the property doesn't fall into disrepair and that it's secure. The servicer will take steps to protect the loan owner's interest in the property, like by changing the locks or winterizing the home, if necessary.
- Reviewing loss mitigation applications and overseeing foreclosures. The servicer also reviews a borrower's loss mitigation application for a foreclosure avoidance option, like a loan modification, short sale, or deed in lieu of foreclosure, and oversees the foreclosure process when borrowers don’t make the loan payments.
The servicer generally gets a fee out of the cash flow from each loan it services in return for performing these duties.
Why Do I Need to Know the Difference Between the Loan Owner and the Servicer?
It’s critical to understand who owns your mortgage loan and which company services it for several reasons.
For instance, if you’re already in foreclosure, you’ll want to know who owns the loan because if the foreclosing party doesn't hold your loan, you could have a defense to the action based on standing. Also, different loan owners offer different loss mitigation options to borrowers. So, it's a good idea to know who owns (or guarantees) your loan so you'll know what alternatives to foreclosure might be available to you.
If you want to apply for a loan modification, you need to contact the servicer, not the lender or holder. You should also contact the servicer if you need general information about your loan account, like the monthly payment amount, the next due date, or late fee information.
Getting Help
If you believe your servicer isn’t performing its servicing duties correctly or if you have questions about whether a foreclosure is proper, consider consulting with a local foreclosure lawyer.
If you want to learn about alternatives to foreclosure, consider contacting a HUD-approved housing counselor.