In 2013 I received a number of emails from consumers regarding the topic of loan servicing and service releases.
In this discussion I will address the topic of mortgage servicing and further discus what a service release is and how it could affect you.
If you were to receive a service release notice from your lender or if you have received one in the past,or anticipate receiving one in the future—we hope that this discussion will help better prepare you for what lies ahead!
Just What Is Mortgage Servicing...
Mortgage Loan Servicing is the act of billing, collecting payment and filing reports for a mortgage loan.
In many cases it includes loan analysis, default follow up and the management of tax and insurance escrow accounts.
Mortgage Loan Servicing is often performed for a fee by mortgage bankers after loans are sold to investors.
The lender that you make your payments to is typically the loan servicer—and they make money by earning a portion of the interest that you pay.
These “Serving Rights” are sold in pools—so when your loan is being sold—it is probably being sold along with hundreds of other loans.
How Loan Servicing Works...
Always be aware that there are new players coming into the loan servicing business and with many new rules and guidelines for banks, some are getting out of the loan servicing business altogether.
It is important that you are aware that a service release premium is the payment received by a lending institution, such as a bank or retail mortgage lender, on the sale of a closed mortgage loan to the secondary mortgage market (other mortgage lenders).
It is important that you realize that many mortgage lenders, including most banks and mortgage brokers, don’t hold your loan after it closes.
Instead, they sell it to loan servicers and collect a payment known as Service Release Premium, or SRP.
It’s called Service Release Premium because the lender who wrote the loan releases the right to “service” the loan and gets a "premium" for doing so.
Keep in mind that when your loan is sold, nothing on your loan changes except where you send your payment.
Your payment amount, rate, and terms all remain the same and most consumers are often unaware of the loan being released to another loan servicer.
If you were to see a change in the address on where you normally send your payment, your loan more than likely has been sold and is—or will soon be serviced by that new loan servicer.
Selling mortgages in the secondary market provides lenders new sources of revenue so that they can continue making loans in the future that they will either retain or release—depending on their business model and the current economic climate.
Now that you have a fresh understanding of loan servicing, let's discuss what a service release is in greater detail!
Just What Is A Service Release...
A Service Release is when a loan is sold on the secondary market, it is service released if the new financial institution takes over the servicing of the loan (taking payments, answering questions, handling issues, filing reports, sending out 1098's etc.).
In essence the loan is sold from one servicer and the new purchaser begins servicing the loan!
In comparison, if a loan is Service Retained—the loan is sold on the secondary market, however, the servicing is retained by the company who originally issued the loan or who currently had the loan.
If the bank that you selected for your loan sells the loan, but continues to service the loan—(taking payments, answering questions, handling issues, filing reports, sending out 1098's etc.)—the loan is service retained.
In essence the loan is sold from the lender—however, the lender continues to service the loan!
When your loan is “service released” it is being transferred to another loan servicer.
For example, if your loan is currently with Bank Of America it could be “service released” to PennyMac—who would from that point on be the new servicer handling your loan.
When processing a short sale and the loan is service released—it could cause major implications.
If the transaction does not have short sale approval with the original servicer, the approval process will likely have to start all over. That has been my experience in almost all cases.
If you have short sale approval it is possible to potentially have the new servicer uphold the approval, but they are not required to do so.
If you are in default on your loan—or in the short sale process it is particularly important for you the borrower(s) to keep an eye out for any mail that states that your loan will be service released.
If you have moved out of the property and you have not notified the servicer (your current lender) of your new address, you might not receive this notice in a timely manner.
Having the knowledge of a pending service release is important because at times it’s possible to request a postponement of a service release to allow a transaction to close if it is already in the short sale process and approval has been granted previously.
If you have any questions regarding a service release or how it may affect your transaction be sure to have your real estate agent look into the matter—and inform you appropriately.
Final Thoughts on Loan Servicing & Service Releases
It is important that you realize that on many occasions borrowers (you) often qualify for lower mortgage interest rates than lenders offer you!
That’s because of the SRP or Service Release Premium!
The higher the interest rate that the lender can sell to you—the higher the SRP they collect when they sell your loan to investors.
It is important that you properly shop for your mortgage loan on the front end to avoid paying additional interest or fees!
Other than competition with other lenders for your business, they don’t have an incentive to offer you the lowest rate—unless you show that you are knowledgeable about mortgage loans and you know that your credit and other factors are strong—and you show a willingness to look elsewhere for a better rate.
Many lender's will often double-dip, charging high fees up front and collecting SRP on the back end!
When mortgage servicers buy your loan, they are paying for the future income that they will receive from the mortgage interest.
The higher the interest rate on the loan, the more the loan is worth to the investor and the more the investor is willing to pay to the lender to buy the loan.
In a nutshell the lender makes more money in SRP—on loans with higher interest rates, and less money on loans with lower interest rates!
You need to know this prior to applying for your home loan—or refinancing.
We hope that you have gained valuable knowledge from this discussion and you will utilize what you have learned.
By doing so you can make a better decision—whether you are a current homeowner considering a short sale, a current homeowner considering refinancing or you anticipate home-ownership in your future.
Keep in mind that most mortgage lenders make money in two ways:
1) they make money up front by charging fees
2) they make money when they sell your loan
In easy to understand terms—a service release is when one bank/servicer sells its loan servicing rights to another servicer.
Once that occurs the loan is considered “service released” to the new servicer.
Or another way of looking at it is when your bank or mortgagee—assign, sell, or transfer the servicing of a loan—at any point while your loan is outstanding.
By knowing that your loan was service released you can prepare your mind for the anticipation of further delays in the selling of your property—if you are in the middle of a short sale—or if you are in default.
If you are current on your loan a service release will only result in you sending your payments to a new address (address of new servicing company that bought the loan).
You will normally be given advance notice before a transfer (service release) occurs—whether you are in the short sale process or at any other time while your loan is outstanding!
Finally, loan servicing is a routine process in the mortgage lending industry and servicing of loans often change hands.
Don't get too uptight—as long as you are current on your loan and you don't anticipate difficulties with your mortgage payments in the future you will be just fine!
We wish you untold success in your future!