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Antonio Said:

Should your mortgage lender be local?

We Answered:

Hi, I'd like to explain a bit about the mortgage business. There is a difference in the service you get at the time of application and at closing the loan, local is easier since you have someone there to help you vs. originating a loan on the phone or internet and mailing documents all over the place. So, local is better.

The ONLY kind of mortgage you can get from a lender that stays in the community is a short term balloon mortgage with an adjustable rate or one that is fixed for no more than three years. Banks do not make AND HOLD long term mortgages, those with interest rates which are fixed for more than three years are sold. These loans are called secondary market loans.

The reason a bank can not hold a long term fixed rate loan is because of the interest rate risk, the risk that a bank would loan money out from their vault at 6% and then interest rates would go up to 10%, In that case, the bank would be losing 4% on the principal amount! They would lose money, big money. But, if they loan it out for short periods of time, the risk that they get stuck in such a situation is reduced for the term of the loan that remains.

Most people think banks loan money that belongs to them, they don't, they fund the loan at closing the transaction, then sell it, usually at a profit based on the interest rate and they get that money back. They can make additional money by "retaining servicing" or keeping their right to collect the payments and administer the loan for the institution that purchased the mortgage. By the bank keeping the servicing, their customers think since I send my payment to ABC Bank, they must have my mortgage, not so.

The people who bought the mortgage put it with a block of mortgages, millions of dollars worth, and then sell that bundle to investors through the purchase of bonds. So wall street investors buy bonds, the cash goes to the wholesale mortgage company, then it goes to the bank to purchase new mortgages. It's a cycle of funding that keeps money available for home loans.

Some loans are sold to investors and the servicing is not kept by the bank that originates the loan. In that case, borrowers will then send payments to who ever, out of town and they will have a 1-800 number to call if they have a problem, but you send your money out of the community to the new company that has servicing rights or that owns the mortgage.

Most adjustable rate mortages are also secondary market loans and are made and sold like the fixed rate loans. These loans allow for interest to be adjusted over time, but never more than say 6% over the starting rate over the life of the loan, so the interest rate is reduced, but not eliminated, so banks sell those as well.

So, if you get a good mortgage with great terms and conditions, the money does not come from your lender and your payments leave the community, no matter what!

Hope this clears all that up! Good luck,

Byron Said:

Did Countrywide bother to read any of the mortgage contracts they purchased from lower tier banks?

We Answered:

It appears to me the Countrywide was very careless in making loans to people who could not repay those loans.