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Why Would Lender Sell a Loan?


snickstx
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The last post in this topic was posted 6423 days ago. 

 

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I was reading an earlier post about a mortgage being sold and had an epiphany, well sorta.

 

I'm sure there are myriad reasons a lender would sell a loan portfolio, but if a loan is performing, would they still do this. I'm not talking about some of the smaller lenders that are still trying to get a foothold in the industry and see diversifying as a stepping stone. I am talking about the nationwide lenders that are in mortgages for the long haul.

 

The only thing I could think of is if the market changes enough, that the money costs for a new loan outweigh the profitability of a new loan. Thus, the lender will take a hit on selling it for a discount, hoping to make it up with future funding from sale proceeds.

 

I guess I'm a little bored tonight.

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First is capacity. They have a finite amount to lend and by selling loans they've already made, they now have fresh cash to make more loans. Presumably they get back their expenses and some profit when they sell.

 

Another is that they've locked in the value of that loan. If market interest rates go up and you're a bank holding a loan with a low interest rate, the value of that receivable that you carry on your books decreases. As an example, say the bank makes a $100K 30-year loan at 5%. They hand over $100K to you and they show an asset on their books of $100K receivable from you. That receivable is actually calculated as the present value of the future payments they expect to get from you, discounted at the loan rate.

 

Let's say that interest rates rise and the market rate on mortgages is now 7%. The asset value of your mortgage that they can carry on their books just went down to $80,688. In the 1980s, many banks had huge financial problems because interest rates skyrocketed and they were holding onto mortgages made at low fixed rates.

 

So who's left holding the bag now if interest rates rise? Well, that's one reason banks like ARMs- the homeowner bears most of the risk. The other thing that happens is that large numbers of loans are packaged and "securitized"- sold to investors. It's not a bad deal for investors who want some fixed-income investments to balance out swings in the stock market.

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I was reading an earlier post about a mortgage being sold and had an epiphany, well sorta.

 

I'm sure there are myriad reasons a lender would sell a loan portfolio, but if a loan is performing, would they still do this. I'm not talking about some of the smaller lenders that are still trying to get a foothold in the industry and see diversifying as a stepping stone. I am talking about the nationwide lenders that are in mortgages for the long haul.

 

The only thing I could think of is if the market changes enough, that the money costs for a new loan outweigh the profitability of a new loan. Thus, the lender will take a hit on selling it for a discount, hoping to make it up with future funding from sale proceeds.

 

I guess I'm a little bored tonight.

 

A mortgage being sold on the secondary mortgage market has very little to do with that single loan, and not an awful lot to do with current interest rates (they're going to do it regrardless of the rates, more to the point). It has more to do with your lender taking the loans that it has recently made and selling them (or their servicing rights) to another company or "government entity" so it can get cash to make other loans. Most of a mortgage company's profits come from the secondary market, believe it or not.

 

It's possible that the loan has been groupled by similar statistics (rate, term, risk factors, etc.) into a huge pool of loans that is being sold as a mortgage backed security. Or it could have been part of a smaller deal between 2 companies. Some of these deals are as small as 20-30 loans changing hands for cash value.

 

It's also possible that the lender has only sold the rights to service your loan to another company. The new servicing company would then make a small commission for handling the payments, escrows, etc., but the original lender would retain the asset itself. The original company may also sometimes sell the loan itself but retain the servicing rights.

 

It's a many multi-billion dollar (incredibly confusing) industry that not a lot of people are truly aware exists.

 

Just my $.02

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It's a many multi-billion dollar (incredibly confusing) industry that not a lot of people are truly aware exists.

Just my $.02

 

"incredibly confusing" may be oversimplifying it a lot...

 

http://pages.stern.nyu.edu/~igiddy/ABS/MBStypes.htm

 

A lot of this rocket science was developed by Michael Milken, who really deserves a Medal of Freedom

for modernizing our financial industry despite his (minor) misdeeds.

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It's a many multi-billion dollar (incredibly confusing) industry that not a lot of people are truly aware exists.

Just my $.02

 

"incredibly confusing" may be oversimplifying it a lot...

 

http://pages.stern.nyu.edu/~igiddy/ABS/MBStypes.htm

 

A lot of this rocket science was developed by Michael Milken, who really deserves a Medal of Freedom

for modernizing our financial industry despite his (minor) misdeeds.

 

MBS's are just the tip of the iceberg. Servicing rights is a NIGHTMARE.

 

I work in this part of the industry. You think dealing with your local DMV is a pain? Try getting an answer (or, God Forbid, a piece of paper) from someone in FANNIE MAE. :grin:

Edited by jamied66
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