If you have questions about your mortgage, do you know who should you call? After you close on the loan, your main contact for questions about your account—and to ask about foreclosure alternatives—is your loan servicer. The servicer is the company that handles your loan account. The servicer might be loan owner or, more likely, it could be a different company. (To get basic information about servicers, see What’s a Mortgage Servicer?)
For more information about how mortgage servicing works, read on.
Here are the main duties of a servicer:
The primary duty of a servicer is to collect payments from borrowers. The servicer then distributes (“remits”) the part covering interest and principal to the lender or its successor (called an “investor”), and distributes escrow funds (see below) into the escrow account, if there is one.
Most mortgages and deeds of trust allow the lender to collect money from the borrower—usually on a monthly basis—to pay real estate taxes and homeowners’ insurance for the secured property. This money is typically called “escrow funds.” By collecting escrow funds and paying the insurance and tax bills when due, the lender ensures that the security (the home) doesn’t accumulate liens for unpaid real estate taxes and is protected from loss due to fire or other hazards.
The lender usually delegates the right to collect escrow funds and pay the bills to the servicer. If you have an escrow account, your servicer will send you an annual statement with details about the activity in your account.
The servicer sends monthly billing statements to borrowers, contacts slow payers, answers questions about the account, and sends payoff statements when borrowers request them.
In order to effectively give this information to a borrower, the servicer uses a computerized loan management system. The system keeps track of the borrower’s account and communications with the servicer, as well as communications between the servicer and various service providers, like the insurance company, tax collector, and attorney (or trustee) when a loan is in foreclosure.
The servicer manages the property if the borrower abandons the home. Most mortgages and deeds of trust give the lender the right to do whatever is reasonable or appropriate to protect its interest in the property, like entering the property to make repairs or changing the locks, if the borrower permanently moves out of the home.
Loans often require private mortgage insurance (PMI). PMI reimburses the lender if you default on your loan and your house isn't worth enough to entirely repay the debt through a foreclosure sale. The servicer collects and distributes the premiums for PMI.
The servicer also accepts prepayments, reviews borrowers’ loss mitigation (foreclosure avoidance) applications, and manages the foreclosure process when borrowers fail to make payments.
In return for performing these duties, the servicer generally receives a fee out of the cash flow from each loan it services. But how is the fee determined?
When the servicer handles loans for one of the quasi-governmental agencies, Fannie Mae or Freddie Mac, the applicable agency determines the fee. (To learn more about Fannie Mae and Freddie Mac, see Who—or What—Is Fannie Mae? and Who—or What—Is Freddie Mac?)
When a private investor owns the loan, the market drives the servicing fee. Generally, the fee depends on the underlying credit quality of the borrower. Servicing a loan with a higher quality credit rating brings in fewer fees because servicing costs are lower. Servicing a loan that has lower credit quality (subprime loans) generates a higher fee because borrowers tend to default on this type of loan, which makes them more labor-intensive to service. The servicer steps in and tries to help the borrower avoid foreclosure, as well as handle a foreclosure, if needed, which means more work for the servicer. (Read about federal laws that require the servicer to try to help a borrower avoid foreclosure.)
Lenders often sell the loans that they originate to bring in income so that they can turn around and make more loans. Servicing rights are also often bought and sold, separate from the underlying loans. (Learn more in What Happens If My Mortgage Is Sold to a New Owner?)
After a servicing transfer, in most cases, your old servicer has to give you with a notice of the transfer not less than 15 days before the effective date of the transfer. Your new servicer must give you a transfer notice not more than 15 days after the transfer date. Or the servicers might choose to send a combined notice not less than 15 days before the transfer.
To find out the identity of your servicer, you can:
If you think your servicer is mishandling any of the duties mentioned in this article or violating the law while servicing of your loan, consider talking to an attorney—especially if you’re facing an imminent foreclosure. (Learn about common errors in the servicing industry.)