Loan Modification: What's The Difference Between a Lender and a Servicer?

Lender vs. Servicer: The Good Old Days

This concept is often confusing to people.

Back in the good old days, it was simple. You went to your local bank or Savings & Loan to get a mortgage. You spoke to your personal banker or loan officer who helped you get a loan.

The institution had lots of customers who put their money with the institution in a savings account, CD, checking account, etc. The institution paid interest to their customers, which gave them the right to use money to lend out to other customers.

You can see why banks did not want to give bad loans to people. They were lending the money of other customers and the loans remained on their books. Likewise, if a borrower got in trouble, they were very motivated to keep them in the home. This was often your local bank in your community. You had developed a personal relationship with them, and they were tied to the community. If the community could get hit hard by defaulting mortgages, so could the bank, hence they were highly motivated to work with you.

The Problem of “Securitization”

But, then this all changed. In the 80s, many Savings & Loans institutions went out of business, and in the 90s something called “securitization” became popular.

What exactly is “securitization”?

Essentially it is a process in which loans are pooled together and then sliced and diced into securities which can then be sold on the secondary market on Wall Street. So basically, you have no idea who actually owns your loan. Your loan probably started with a broker who used a loan originator who then immediately sold off your loan.

The administration of your loan is now handled by a company you’d think was your lender. You send your payment to them, but they are actually just a “servicer”. They get paid to service your loan, but they don’t actually own it.

Lender vs. Servicer: The Challenges

Unfortunately, since they only service your loan, getting a loan modification isn’t necessarily that easy. They are bound by lender guidelines which define what they are and aren’t allowed to do in the event that a borrower becomes financially distressed and must modify the terms of their loan.

To further complicate the issue, servicers generally represent numerous investor pools, all of whom have slightly different guidelines. If they all had the same guidelines, life would be much simpler. You could simply find out what the guidelines were and what kind of modifications were available, and from the outset of this process you’d know if you were going to get approved because there would be no mystery.

Instead, you have to go through a long a laborious process with your servicer to get your modification approved, and ultimately there is no guarantee that it will actually get approved. However, armed with a little knowledge, the process will at least be a demystified for you and you will dramatically increase your chances of getting approved.

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