You may or may not know that Citibank – like all major banks – already sells almost all of their loans to investors, like Fannie Mae, Freddie Mac, or hedge funds built by Wall Street investment banks that buy mortgage pools.
So why, when you get a loan at Big Bank, Inc, do you make your payments to the bank? Because there is a difference between owning your mortgage and servicing your mortgage.
The company that owns your mortgage has the right to the income stream from your payments. However, most companies that buy pools of mortgages are simply investors – they do not have the systems in place to collect the payments and provide service to you when you have questions or need help.
(Some of you will say here that your lender doesn’t serve or help you either, and I can’t disagree, but let’s set that aside for now.)
Traditionally most mortgage lenders sell their loans to investors, but retain the servicing rights. What this means is that they continue to act as the lender, and are paid a small fee by the investor out of every payment you make to provide that service to you on the investor’s behalf. So, you get a mortgage from Big Bank, Inc., and make your payments to Big Bank, Inc, and for all you know Big Bank, Inc. still owns your mortgage. But they don’t.
Some lenders, on the other hand, are only in the business of making mortgages, and not in the business of servicing them. These lenders sell both the mortgages (to investors) and the servicing rights to other lenders or servicing companies. Phew!
Why is this relevant today?
CitiGroup – the parent company of Citibank – made a pretty shocking announcement today. They plan to exit the mortgage servicing business by the end of 2018. In other words, if you got a mortgage from Citibank they were already selling your mortgage; now they will sell the servicing rights, too.
If you currently have a mortgage being serviced by Citibank, they have probably already made a deal to sell the servicing rights on your loan. According to Jennifer Surane, writing for Bloomberg News, New Residential Investment Corporation has agreed to purchase servicing rights on loans owned by Fannie Mae and Freddie Mac and currently being serviced by Citi. The outstanding balances on the loans total about $97 billion, and New Residential has agreed to pay Citi $970 million for the rights.
The servicing rights for loans not included in this pool will be sold to Cenlar, FSB.
If your loan is currently being serviced by Citibank and you get a notice to pay a different lender, please do not make any payments to the new company until you have confirmed with Citibank that the new company requesting your payments is, in fact, legitimate! (Old scam – please don’t fall for it.)
What makes this all particularly noteworthy is that it illustrates the complex financial structure of the mortgage industry. Money is made originating loans, servicing loans, pooling and selling loans, securitizing the debt and selling off mortgage-backed securities, and even trading pools of mortgages.
Citi’s move also illustrates how even the Big Banks are having a tough time figuring out how to maintain very high profit margins in an industry where new, lean players are grabbing small slices of the pie here and there. In the long run, will it benefit the consumer? Will the cost savings associated with leaner, more nimble niche players be passed on to the consumer? Or will they merely benefit Wall Street hedge fund managers?
Only time will tell, but we know that – for now – Citibank has thrown in the towel.
You can read the full article here.
This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial, have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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