As long as I’ve owned a home, I’ve had a mortgage. The mortgage I generally have had is usually through whatever lender came through at the time of my home purchase, but isn’t necessarily one of my choosing – it hasn’t mattered much on the company though, because as long as the mortgage rate was what I agreed to, it didn’t matter to me. Within a year or so of buying the home and establishing the mortgage, it always seems that the initial lender “sells” off the mortgage to another institution or bank. When/if that happens, the new company assumes the same terms and my mortgage remains unchanged. Same thing when I have refinance the home – the refinance company comes in with a better rate (used to, at least) and within a short time frame, sells the mortgage off to another company. To make things even stranger, this has happened to me even with an established mortgage of several years with the same company/bank. I can’t fathom why/any benefit the banks get from doing this.
TL;DR: why do banks sell/transfer mortgages around if there is no change to your term? How does it benefit them?
In: 293
Banks can only lend out a certain amount of money based on their reserves (basically money they have on hand). Once they lend their capacity, they can’t lend anymore until after they’ve reduced the amount of money they have lent out. If they sell the loan to another financial institution, they reduce the amount of money lent out and simultaneously get an infusion of cash. Both of these allow them to write more loans.
Now why do they want to write more loans rather than just get the interest on the already outstanding loans? Fees are a big part of the answer – the banks earn fees for writing the loans and they get those fees up front and don’t have to wait for decades of interest payments. Secondarily, getting paid now (by selling the loan) eliminates the risk of non-payment down the line. Of course this risk is priced into the sale of the loan, but again, cash in hand is what the banks really want.
Then there’s the issue of big and small institutions. A smaller institution with a small number of outstanding loans will take a big hit if just a few of those loans go bad. A giant institution with thousands or tens of thousands of mortgages can manage the risk of loans going bad far more easily – “normal” default rates simply don’t pose an existential threat to large institutions in the same way they do to smaller institutions. So a big institution is willing to take more risk on a given loan or portfolio than smaller institutions, and that difference in risk tolerance allows for smaller banks to “give up” a bit of potential profit which is earned by the bigger institutions. And then bigger institutions can spread the cost of loan servicing (workforce, equipment, office space, legal costs, etc.) among far more loans, driving down the per loan servicing cost.
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