It’s been something of a common practice for lenders to sell mortgages for years now. And with some companies going under, and other buying up the leftovers, it’s possible your mortgage may change hands multiple times over the life of the loan.

Who Buys Mortgages?

A mortgage can change hands in several ways: it can be sold, your lender can be bought up by another company or your lender may hand over the rights to administer your loan to a mortgage servicer. A mortgage servicer is typically a company that specializes in processing and administering mortgages. Among other duties, a mortgage servicer collects monthly payments, pays your property tax and insurance from your escrow account and handle any delinquencies.

Your Rights When Your Mortgage Changes Hands

Because there are more than a few opportunities for something to go wrong when your lender hands over your mortgage to someone else, it’s important to know your rights.

• Notification in Writing: In the event that that your mortgage is sold, or even transferred to a new servicer, both the original servicer and the new one are required by law to notify you — including giving you full contact information for the new servicer, as well as the date of the changeover. These notifications are typically mailed, making it even more important that you open any correspondence you receive from your lender. Unopened mail still qualifies as proper notification by your mortgage servicer.
• The Terms of Your Loan: Any mortgage servicer who purchases your loan is required by law to adhere to the terms and conditions of your original mortgage agreement. The only exception are any terms directly relevant to how your mortgage is administered.
• Grace Period: When your mortgage servicer changes, you have a 60-day grace period. During that time, you will not be charged a late fee if you accidentally send a payment to your previous servicer.
• Dispute in Writing: If you have any questions or disputes with your new mortgage servicer, you must continue to make payments while you settle the dispute. However, put your dispute in writing — mortgage servicers are required to investigate such disputes and resolve them within 60 business days according to law.

Adjusting to a New Servicer

You’ll typically receive new information on submitting your payments, including a new address for mailing checks. It’s important to make sure that your payment is going to the correct recipient as soon as possible — if you rely on any sort of online bill payment system, make sure that you make necessary changes so that any automatic payments are handled correctly.

It’s also crucial to go over your mortgage statements with a little extra care in the months after your mortgage changes hands. Have all payments been recorded correctly? Have insurance premiums and taxes been paid on time? It’s possible for something to fall through the cracks, especially when you consider the fact that hundreds or even thousands of mortgages were probably sold as a package deal, including your own.

Popularity: 11% [?]

I received a press release last week about a company providing short refinancing. It’s similar to a short sale — convincing your mortgage lender to accept whatever you can get in a sale of your house — in that your mortgage lender has to be willing to take less than what you owe for your debt, often significantly less. In a short refinancing, a homeowner refinances a mortgage for less than what is currently owed and the lender forgives the difference between the new loan and the old.

It sounds great on the surface: homeowners get to stay in their houses, lenders get at least a portion of what they’re owed and everyone is happy. At least, that’s the way this press release (from a mortgage company specializing in short refinancing, of course) made it sound.

The realities of short refinancing are a little more complicated. It is one of many options a homeowner might have — and from the homeowner’s point of view it can be a very good one. But while a homeowner might like the idea, most lenders don’t. The simple fact is that most lenders just don’t like the idea, because they’ll face substantial losses on any short refinancing. Lenders can’t afford short refinancing unless there’s just no other way to still make a few dollars off of a house. Even a short sale is preferable — after all, the homeowner that has already proved that he can’t manage a mortgage will be out of the picture.

Advocates of short refinancing have argued that lenders should at least consider the option because of the potential of a lender winding up with houses sitting empty and unsold. But a lender can afford to foreclose on a home and let it sit empty for a few months, if they can sell it for enough money to cover costs down the road. It’s like flat out debt forgiveness — it’s just not an option that lenders can exercise often and still stay in business. Many lenders are also concerned that if short refinancing becomes a more common option, homeowners will try to take advantage of that fact. Foreclosures are scary — homeowners will work hard to avoid them — but the opportunity to reduce the amount a homeowner owes on a mortgage just sounds like a good deal.

It is possible to get a short refinance through absolute persistence, as long as the homeowner can prove that he can’t catch up by reducing expenses or increasing income, as well as can prove that he could meet the payments of a refinanced mortgage. A financial review and appraisal are the bare minimum requirements. But short refinancing remains rare. Companies that promise to negotiate short refinances for homeowners are — at best — overly optimistic. I’ve taken a look at several websites for such companies and I know I wouldn’t put my home in their hands. I’d recommend that any homeowner trying to get a short refinance to research their lender’s policies thoroughly and set up meetings to discuss the prospect on their own.

Popularity: 15% [?]

Despite the bad news in the business section, many of us are still doing okay financially. It’s hard to tell if things are going to stay that way, so a lot of people are looking at ways to ensure that — if something does happen to them — they’ll still be okay. There are two pieces of advice in particular that seem to be going around: first, keep as much liquid cash as you can, or second, pay off as much debt as you can. The two tactics are mutually exclusive and it can be hard to decide whether these pieces of advice can really help you.

Your Mortgage

The liquidity argument pops up just about every time someone mentions a mortgage. In most situations, if you can pay your mortgage down ahead of time, it’s a good idea to do so. You cut the interest you’ll pay in the long run and you build a little extra equity. But in tough times, some people think that wisdom doesn’t hold true. The argument is that it’s better to keep those extra payments as cash and put them into savings — if something happens, you can’t just pull money back out of your mortgage, after all.

It’s a tough decision to make. Owing less money seems like a good idea, but if the future seems even a little bit shaky cash can be important. It would be nice to pay off the mortgage ahead of time, but for now, I’d make building up an emergency fund a higher priority. And as for all those suggestions to open HELOC and other lines of credit to have cash available ‘just in case,’ I think that may be one of the worst pieces of personal finance advice I’ve ever heard. Taking on debt on the off chance that you’ll have trouble paying a bill or two is just poor financial planning.

Your Credit Card

Liquidity is much less of an issue with a credit card. After all, if you can pay down your balance, you’ll have more credit available if you need it. I don’t like the idea of using a credit card as an emergency fund. Honestly, though, I can picture a lot of situations where it would be necessary. Depending on the interest rate on your balance, paying more than your required monthly payment can be a good bet: if you can improve your credit even a little bit, you may be able to get your credit card company to lower your interest rate. Paying down your balance can be worth the risk of not having a lot of cash on hand.

Looking Ahead

Right now, I’d recommend making an effort to eliminate consumer debt and build an emergency fund over paying off your mortgage early. Both approaches will put you on more steady financial ground if there are problems down the line, and provide a few more options for handling future expenses you might not be able to take care of otherwise. Paying more on your mortgage just doesn’t offer the same sort of security net.

Popularity: 51% [?]

On Friday, Henry Paulson (the U.S. Secretary of the Treasury) and James Lockhart (the director of the Federal Housing Finance Agency) announced that the U.S. government is putting Fannie Mae and Freddie Mac into conservatorship — the government is bailing the two companies out. The move is an effort to guarantee that there is still money available to the two companies so that they can continue buying MBSs (mortgage-backed securities) and allowing other banks to loan money.

Paulson’s move is already being described as “one of the most sweeping government interventions in private financial markets in decades.” Journalists and economists have spent the weekend discussing the consequences for the government, the companies and the economy. But what does a bailout mean for the rest of us?

Paulson’s Plans for Conservatorship

During the announcement, Paulson named four things that he planned to do with Freddie Mac and Fannie Mae:

1. The two companies will modestly increase their MBS portfolios (meaning that smaller banks will be able to issue more mortgages) until the end of 2009. Starting in 2010, the two companies will start reducing their MBS portfolios. For the most part, that means that Fannie Mae and Freddie Mac will be selling off the mortgages they hold to other companies, starting in 2010. Depending on how willing other companies are to buy mortgages, it may get harder to get a mortgage in 2010.
2. The Treasury Department and the FHFA will use Preferred Stock Purchase Agreements to make sure that both companies maintain a positive net worth, as well as guarantee to debt holders that they will be paid.
3. The Treasury Department is creating a new ’secured lending credit facility’ — a governmental agency that can lend money to companies like Fannie Mae when they can’t get loans elsewhere.
4. The Treasury Department is temporarily buying MBS in order to make sure that banks are capable of offering mortgages even with the normal backers / buyers of MBS slowing down their purchases.

Fannie Mae and Freddie Mac Stocks

The government isn’t helping out stockholders as a part of the bailout. Anyone with stock in either company is no longer receiving dividends and the values of those stocks have dropped dramatically. The fact that the government is stepping in has actually caused both stocks to fall further.

There’s no guarantee that the stock situation will improve, either. Unfortunately, if you hold stock in either Freddie Mac or Fannie Mae, you have very few options.

Freddie Mac and Fannie Mae Mortgages

If you currently have a mortgage held by either company, very little changes. You still have an obligation to make your payments and there shouldn’t be any changes to how the company operates at that level. The same goes for any other loans you have from either company, as well. The conservatorship is specifically set up to make sure that Freddie Mac and Fannie Mae continue operations as normal.

At upper levels, however, there will be quite a change up — executives and boards at both companies will be leaving.

Popularity: 48% [?]

We’ve heard the news about the failing housing market, how prices are plummeting and sales are stagnant. Now is the time if you’re looking to buy, but be careful. Even in this buyers market you can still trip up. Here are a few tips and things to consider before signing on the dotted line.

More Than Just Rent

Looking to move beyond renting? This is without a doubt an excellent time to buy. With interest rates so low and home prices finally coming back down to earth, the time is now. Before you go diving in headfirst however, sit down with your local lending officer or financial advisor and really plan out your next step.

Always remember that you’re going to be paying a lot more than just your mortgage when you buy a home, and those payments can fluctuate. Depending on your financial situation, a steady rent might be better than an adjustable loan with taxes, utilities, maintenance costs, insurance, etc. In order to see if your income can support a mortgage, calculate your Debt to Income Ratio.

Debt to Income (D/I), is calculated (to a point) by your lender, but you can do a more accurate one yourself. Obviously you take your monthly income (I suggest the net amount, after taxes), then subtract the bills you have to pay each month. These include your car payments, any credit cards, utilities, etc. What is left is how much you are able to put towards your mortgage payment, and hopefully your own savings and use. By doing this you can work backwards to see what price range you can afford.

While your credit score and report are important parts of getting a home loan, your D/I is just as important. When the bank looks at your credit score, they are looking to see if you have a history of paying back your loans. If your history is good, they are more likely to approve you. But however good your credit is, if your income can’t support the monthly payments (which, if you’re a first time homebuyer are probably adjustable) you still won’t be approved. By paying down your credit cards and other debt you not only increase your credit score, but you also lower your D/I. The lower your D/I, the more cash you have on hand to put towards the mortgage, and therefore the banks feel better about writing you a check for several hundred thousand dollars.

While this all sounds a little scary for first timers, sitting down and getting your expenses on paper will help take a lot of the guesswork out of buying a home. Many don’t realize exactly how in debt they are until they list every expense they have during a month. If you calculate your D/I, you’ll know whether you need to get a higher paying job, pay down credit cards, or simply skip the mocha latte every morning in order to achieve your goal of buying a home.

Popularity: 16% [?]

Classic advice for handling any amount of debt — mortgages, credit cards, etc. — is to pay more each month than is actually required. For instance, if I had a monthly credit card bill of $100, but I had an outstanding balance of $10,000, with 10% interest, it would take me 213 months (or 17 years and 9 months to pay off that card). But if I could make payments of $200 each month, the length of time I’d be making payments drops to 65 months (or 5 years and 5 months), and if I could kick it up to $500, I would be out of debt in 22 months — less than 2 years. While the numbers for the credit card balance and payments are made up, the math isn’t. You can use BankRate’s credit card calculator to figure the numbers for your own situation.

A lot of people suggest handling a mortgage in exactly the same way. Any payment you make beyond your monthly required payment goes directly towards the principal amount of the mortgage — meaning that you’re not paying off extra interest, and will, in the long run, save you money.

But there are some drawbacks to prepaying a mortgage in this fashion, and even to paying off debt quickly, depending on your interest rates. There’s no question that you should at least make the minimum payments each month, but there may be ways to take better advantage of other money.

Do you have a 401(k)? Depending on the interest on your debt, you may actually come out ahead in the long run if you can invest your money in a retirement account. You’ll have to run the numbers for yourself, but if your employer matches the money you invest in your 401(k), there is almost no reason that should convince you to not invest up to the matching limit. While prepaying your mortgage can save you money on interest, your employer is essentially offering you free money that you cannot get any other way if one of your benefits is a 401(k) matching program! And who wants to turn down free money?

You might also decide against making extra payments on any debt if those extra payments could put you in danger of building up more debt. If you have no cushion of cash, no emergency savings, you can put yourself in danger of racking up more debt if something unexpected happens. Having the money to deal with emergencies should take precedence over paying off debt quickly. However, if you can place the money you were planning to direct towards your mortgage or credit cards into savings and build up a decent emergency fund, there is no reason that you can’t start up those extra payments after you’ve built up a healthy cushion.

Popularity: 26% [?]