With mortgages as common as they are today, most borrowers know the standard steps in securing a loan for a condo or co-op. In the simplest terms, a borrower must first pick a lending institution, be it a commercial bank or mortgage banker. After that comes the application process, during which requisite financial and employment information is provided to the lending institution. After approval, borrowers close on the loan. From here, the only thing most borrowers are concerned with is making their required monthly payments.
But what happens to that loan between the closing and the final payment? Does it stay in one place? Who actually funds it? Why is it often serviced by an organization different from the one that closed on it?
The process beyond the borrower/lender interface is invisible to borrowers but very important nonetheless. Practice varies from bank to bank and mortgage broker to mortgage broker, but the majority of lenders sell the mortgage loans they make and sell the servicing of the loans, though not necessarily to the same place. Lenders sell–or opt not to sell–based on what is most advantageous and lucrative for them.
A Loan’s Journey
Lenders are part of the primary mortgage market–the place where mortgages originate and funds are loaned directly to borrowers. Before the advent of Freddie Mac and Fannie Mae, lenders had two main options: They could hold onto mortgage loans and service them, or they could sell them to each other to balance their portfolios. There was no one universally recognized method for dealing with these loans.