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Service? Hah!
Back in the old days (when the Boomers were worried about turning 40), if you got a loan to buy a house, you sent the monthly payment to the people downtown who held your mortgage in their vault.
Not any more. While many consumers have detected the disembodied nature of modern "lenders", very few have figured out that the people to whom they send their house payments don't own the mortgage.
Since the 1980's, after closing, your retail lender transfers your loan to a wholesaler (which may be a captive of the retailer, or vice versa, or independent). Then, at the wholesaler or at an investment bank (the next level up: Merrill, GoldmanÉ) your loan will be transformed: glommed with thousands of others into a "mortgage-backed security", then sliced and diced into zillions of easily traded pieces ("derivatives"), and sold all over the world.
There are exceptions: the occasional surviving S&L making special purpose adjustable rate loans; and the bank market for home equity lines of credit and second mortgages.
In the case of the most common mortgages -- Fannie/Freddie 30- and 15-year, most ARMs, FHA, VA, -- the loan and the payment are usually pre-disconnected, weeks before closing, when the interest rate is locked and the path from retail to Wall Street determined.
The outfit that sends you the coupon book is only a conduit for your money, forwarding it to the millions of holders of the zillions of pieces of loans. This forwarding is done for a fee: .25-.50% of the outstanding balance on your loan each year. It's a small percentage, but real dough: on a $200,000 loan, maybe $5,000 during the loan's six-year average life.
To earn that kind of money, the forwarders have duties beyond forwarding: make sure your taxes and insurance are paid, collect late payments, and foreclose on you if you quit paying altogether. The industry name for a collector/forwarder is loan "servicer". They provide service all right, but only to the people who pay them: the holders of the zillions of pieces of loans. (By the way, mortgage servicers are indistinguishable from the servicers of student loans, which go into Sallie Maes, serviced -- badly -- by Unipac, et.al.)
A mortgage servicer's idea of service to you includes hatfulls of mail offering bad insurance; weird deals where you pay them $300 to take your payments twice as often; and, above all else, no human beings to answer the telephone. Servicers are the HMOs of the financial world: if you stay on hold long enough, you'll stop worrying about your problem, or forget why you called.
The servicer's role in the who's-doing-what-to-whom of modern mortgages can be downright insidious. For example, the worst credit problem to have on your record today is a late mortgage payment. One in the last year, and you're dead at most A-quality lenders. Why? Your loan could be a pain to service.
Servicing economics drive the whole, non-Wall Street, consumer and wholesale end of the mortgage business. For example, mortgage retailers don't make money by making loans; retailers make their living by selling servicing rights to wholesalers for lump sum fees.
The wholesalers are in the mortgage business solely to acquire servicing rights: as the loan screams through the wholesaler on its way to Wall Street (together with any points and "origination fee"), the wholesaler scrapes off and retains the servicing right and future income.
The mortgage department at many banks exists only to help the mother bank acquire servicing a little cheaper than the bank could buy it from independent retailers. When a bank says "We don't sell our loans", they mean the servicing; the loan disappears into a zillion pieces along with all the rest.
Servicing has its own post-closing secondary market. If you think your loan got sold two years after you got it, it wasn't the loan: the servicing right got sold to another servicer. The loan was long gone.
Though terrible about phone calls, most servicers do a much better job now than at the end of the 1980's, when tens of millions of loans from defunct S&Ls were dumped into the system. However, If you ever have trouble with your servicer, call the retailer where you got the original loan. Retailers speak servicing jive, and have a trick or two around the phone trees to humans.
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