Understanding Mortgage Assignment: How It Works and What You Need to Know

When a homebuyer gets a mortgage, they agree to pay back the money they borrowed from a lender, usually a bank. These payments are usually made over a period of many years with interest, which is how the lender makes money.  If the borrower doesn’t make payments, the mortgage gives the lender the ability to foreclose on the property to recoup their investment. 

Sometimes, though, the lender decides they don’t want to wait for those years of payments. Instead, they might choose to sell the mortgage to another company. This transfer is called a mortgage assignment, or in some states, an assignment of deed of trust. Here’s everything you should know about how mortgage assignments work.

What is an Assignment of Mortgage?

An assignment of mortgage, or assignment of deed of trust, is a process where the original lender transfers their interest in a mortgage to another party. This could be another bank, a special company that handles mortgages, or an investor interested in buying debts. The original lender sells the right to collect payments from the homebuyer to someone else. This is done with legal agreements to ensure everything is fair and follows the law.

This process is important for lenders because it allows them to get back much of the money they lent without waiting for the 20 or 30 years it might take the borrower to pay it all back. For the new owner of the mortgage, it’s a chance to invest in a steady flow of income.

Some mortgage lenders are homeowners who became mortgage note holders when they sold their house. If the prospective buyer is not able to secure a loan from a bank, these homeowners might choose to offer seller financing. In this arrangement, the seller acts as the lender, agreeing to sign over the house in return for receiving monthly payments until the value of the loan is paid off.

However, if circumstances change and the homeowner wants to receive a lump sum payment or no longer wants the responsibility of managing the loan, they might consider selling the mortgage note to an investor or a specialized company. This sale is facilitated through the mortgage assignment process, transferring all rights and responsibilities to the new owner.

The Mortgage Assignment Process

Let’s walk through what happens during a mortgage assignment:

1. Decision to Sell the Mortgage: The lender decides they would like to sell the mortgage. This could be because they no longer want to bear the risk of the loan, or would like to receive a lump sum payment.
2. Finding a Buyer: The lender looks for a party interested in buying your mortgage. This buyer could be another bank, a company that specializes in buying and managing mortgages, or even a group of investors. The important thing is that they have the money to buy the mortgage and are willing to take on the responsibility of collecting payments.
3. Handling the Legal Paperwork: Once a buyer is found, there’s a lot of paperwork to handle. The most important piece is the “assignment of mortgage document or the “assignment of deed of trust”, a document that officially transfers the ownership of the mortgage from the old lender to the new one. This document must be signed and usually notarized, which means an official witness confirms that all parties signed willingly and correctly. There must also be a transfer of the promissory note, through a process known as mortgage endorsement.
4. Notifying the Homeowner: After the mortgage is officially transferred to the new owner, the homeowner will be notified. This notification lets them know who the new owner of their mortgage is, their contact information and where to send their future mortgage payments. 

Deed of Trust vs. Mortgage

In some states, instead of a mortgage note, the lender may have something called a deed of trust. This can also be transferred to a buyer in the same way. A deed of trust and a mortgage both serve the same purpose — to secure a loan on a property. There are some key differences in how they operate.

Deed of Trust

Involves Three Parties: A deed of trust involves three parties: the borrower, the lender and a trustee. The trustee holds the legal title to the property until the loan is fully paid off.

Non-Judicial Foreclosure: In most cases, a deed of trust allows for non-judicial foreclosure, meaning the trustee can sell the property without court involvement if the borrower defaults on the loan.

Mortgage

Involves Two Parties: A traditional mortgage involves just two parties: the borrower and the lender. The legal title remains with the borrower, and the lender has a lien on the property.

Judicial Foreclosure: Foreclosure under a mortgage typically requires going through the court, making it a longer and possibly more complicated process than with a deed of trust.

Legal and Regulatory Considerations

When a mortgage is assigned from one lender to another, several legal and regulatory considerations must be addressed to ensure the process is handled correctly. Each state has its own laws that affect how mortgages can be transferred, which is why it can be important to know your local rules before selling your mortgage note.

State Laws on Mortgage Assignment

State laws dictate how a mortgage assignment must be recorded and what documentation is required. For example, some states require that the assignment of the mortgage document be filed with the county where the property is located. This helps maintain a clear and public record of who owns the mortgage. Additionally, these laws ensure that the homeowner is protected and that the transfer of mortgage ownership is transparent.

Judicial vs. Non-Judicial Foreclosure Processes

Depending on the state, the foreclosure process can vary significantly. In judicial foreclosure states, the lender must go through the court system to foreclose on a home. This process can be lengthy and requires filing a lawsuit and getting a court judgment. In non-judicial foreclosure states, lenders can foreclose without court involvement if the mortgage agreement includes a power of sale clause. This clause allows the lender to sell the property to pay off the mortgage if the homeowner defaults. 

Compliance Requirements

During a mortgage assignment, all parties must comply with federal and state regulations that protect homeowners. For instance, the Real Estate Settlement Procedures Act (RESPA) requires that borrowers be notified of any change in the ownership of their mortgage. This notification must be sent within 15 days after the mortgage has been sold or assigned. Ensuring compliance helps maintain trust and avoids legal complications.

Why Sell a Mortgage?

You might wonder why a lender would want to sell a mortgage to a mortgage note buyer instead of just waiting to collect all the payments. There are several reasons why selling the mortgage can be beneficial for the lender:

• Managing Financial Resources: By selling a mortgage, lenders can get a large amount of money upfront instead of waiting for monthly payments. This immediate influx of cash can help them invest in other areas, offer more loans, or strengthen their financial footing.
• Risk Management: Holding onto a mortgage comes with risks, especially if the homeowner has trouble making payments. By selling the mortgage, the original lender transfers this risk to the buyer of the mortgage. This can be a strategic move to manage the lender’s overall risk exposure.
• Investment Strategy: Lenders might sell mortgages as part of their investment strategy. Selling mortgages can help them diversify their investments and adjust their portfolios according to market conditions or their financial goals.

Choosing the Right Buyer For A Mortgage Note

For lenders, finding the right mortgage or deed of trust buyer is an important part of the assignment process. Here are some criteria to consider when selecting a mortgage note buyer:

• Reputation and Reliability: The reputation of the buyer is vital. Lenders should look for buyers who have a solid track record of fair dealings and reliability. A good indicator are reviews from actual buyers and a brand presence. This ensures that the mortgage will be managed properly after the assignment.
• Transparency: Transparency during the mortgage assignment process is essential for trust. Buyers who provide clear information about the terms of the purchase and who maintain open communication are preferable.
• Competitive Pricing: Finally, the price offered for the mortgage note is a critical factor. Lenders should seek buyers who offer competitive pricing, which reflects the value of the mortgage and the income it generates.