It is very common for mortgage loans to be sold by the originating lender to another loan servicer. This can either happen immediately after closing or later down the road. Some mortgage holders have seen their loans sold several times over the life of the loan. It can be jarring to have to switch what bank you make your payment to, but rest assured that when a mortgage loan is sold, the new lender cannot change the terms of the loan in any way.
Loan Note Protects You From Changes
You had to sign a thick packet of documents when you closed on your mortgage. One of those documents was called the “loan note.” The note lays out all the terms of the loan, including the balance remaining after the down payment, the interest rate, the years allotted to pay it off, how late payments are assessed and what constitutes default. If there is a early-repayment penalty, it will be specified here as well. Also in the loan note is verbiage protecting you against any changes. It will say the terms are between you and the lender -- “its successors and/or assigns.” When another bank buys the servicing rights to your mortgage, it must agree to abide by the terms of the note.
Most mortgage loan payments include the taxes and insurance on the property. These items can change. The property taxes are reassessed each year and can sometimes increase dramatically. When the bank servicing your loan receives indication that taxes have gone up, it has to send you notification that your payment has increased. But the actual principal and interest portion of your payment (the part that goes to the lender) will not change.
Adjustable Rate Mortgage
The only way for your mortgage payment to increase is if you took out an adjustable rate mortgage. Not only would this be specified in the loan note, but there also would be an additional “adjustable interest rate rider” attached to the deed of trust. Prior to the implosion of the sub-prime mortgage market, some unscrupulous loan originators would trick borrowers into signing up for ARM loans without their knowledge. But recent consumer protection laws, such as Dodd-Frank and the Mortgage Disclosure Improvement Act of 2008, have made it more difficult for predatory lenders to get away with this practice. However, the onus is still on you, the borrower, to look over the documents you are signing carefully, especially the note and deed of trust.
Why Lenders Sell Mortgages
Many mortgage borrowers do not like the idea of their loan servicing being sold. But this practice allows for greater fluidity and more competition in the marketplace. This, in turn, leads to lower costs for borrowers. If every lender were required to retain the servicing on the loans they originated, it would make it nearly impossible for small mortgage lenders (who often have the best rates and programs) to compete with large banks such as Wells Fargo, Bank of America or Chase.
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