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Can Loans Be Traded?

If you are new to the mortgage market, you may have heard that a loan can change its servicer. That raises the question – can loans be traded? And if so, what does it mean for the terms of the mortgage?

Can loans be traded? Yes, loans can be traded. In fact, the secondary market for loans is a very active and important part of the lending industry.

Loans are usually traded between banks, or between investors and banks. Investors will buy loans from banks, and then sell them to other investors.

This allows banks to get rid of loans that they don’t want, and it also allows investors to invest in different types of loans.

If you are a borrower that has received notice about the servicing rights being passed to another financial institution, there is no need to be alarmed. If a lender has decided to sell a loan, they are not obliged to seek the client’s consent. However, both parties involved are obliged to notify you.

Can Loans Be Traded?

Going through the home-buying process is not easy, but as tiresome as it is, it’s exciting and rewarding. Having a roof over our heads is something many of us strive to have, and a mortgage is a means to an end. So, you’ve purchased your first home and began paying your monthly installments on a regular basis, but one day you receive a notification letter stating that your loan has been sold.

Loans can be traded on the mortgage market, and it is all but an uncommon occurrence. What’s more, a single loan can be sold multiple times until it’s fully paid. But if you are wondering about what happens during this process of trade and how it affects your terms, you should also understand the role that servicer plays and the impact it leaves on the loan.

The Mortgage Originator – Your First Contact in the Lending Process

The first contact you make once you enter the mortgage lending process is the mortgage originator. They are an individual who works for a financial organization, like a loan officer for Charles Schwab & Rocket Mortgage. Or they might be working individually, such as mortgage brokers making money by charging an origination fee.

They will work with you throughout the process and take your original application. They either get directly or indirectly paid for working with a borrower through fees and commissions. They are compensated by the lender or the borrower, but never both.

You Are Funded by the Lender

While a mortgage is a personal property, the lender owns the loan. They are financial institutions such as a large bank (for instance, you may have opted for a Bank of America mortgage) or a credit union (such as Navy Federal Credit Union). Their income comes from charging the interest. The amount of interest rate in your contract will depend on several factors, like your credit score and the type of mortgage loan you have applied for.

Servicers Manage the Loan

After the loan has been finalized, it is managed by the servicer. It is a company that may be the lender or not – they are the ones you make your regular monthly payments to and with whom you interact in case of any issues. They also take care of your escrow account, so they are the ones to inform you whether escrow pays home insurance.

Two people signing a contract

Why Would a Lender Decide to Trade a Loan?

As it’s stated, lenders are the financial entities that fund the loan. However, keep in mind that they do not own inexhaustible funds. Especially since mortgages take time (from 15 to 30 years) to get paid entirely, and they are of considerable amount. That’s why lenders eventually run out of money and need to regain some of the capital. This is usually the most common reason why a lender sells a loan.

The other reason is that many lenders do it for profit. While collecting interest rates earns them money over a period of time, trading loans on the mortgage market can bring them profit right away.

Does a Borrower Have Any Rights in the Trading Process?

Loan trading is a standard practice among financial institutions in the mortgage market. However, there are certain rights and obligations that you as a borrower have, and some others that they are not obliged to comply to:

  • A borrower is not required to give their consent before their loan is sold to another financial institution.
  • The lender that owns your loan is currently obliged by the law to notify you at least 15 days before the transaction process begins.
  • The institution which is purchasing the loan should notify you within the next 30 days of finalizing the trading process.
  • You can not stop the loan from being sold on the mortgage market, although this process is nothing to be alarmed about.

How Does the Notification Letter Look Like?

Since the new owner of your loan is due to send you a notification letter in less than 30 days, it should contain several items. First of all, it should state the full name of the new owner (such as the full name of a bank or other institution). Besides it, it should also state the full and correct address of the servicer and a contact for the individual that manages everything and can resolve any issues. It should contain the exact date when the transaction was finalized and the information on whether this transaction is available in the public records.

A woman handing over a paper

Don’t Fret – The Trade Will Not Affect the Terms of Your Mortgage

Receiving a notification letter that informs you about your loan being sold is nothing to worry about because it is quite a common occurrence. In the end, nothing significant changes for you – the terms remain the same, and the only thing that changes is the name of the company you make your payments to. However, if you notice anything out of the ordinary, you should act immediately. Contact the current owner of your loan to sort things out and overcome any obstacles.