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?
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It benefits them in three ways:
1) It is a “cash now for value later” proposition. The investors buying the loan are paying the bank money right now so that they can own the value of your loan’s maturity.
2) It takes the risk off of their books. While loans are listed as an asset to be repaid, they inherently carry risk, and so for a bank to sell your loan means that it turns from an asset with risk to cash on hand.
3) The investors often will package loans into financial instruments to resell to other investors, thus reducing the risk and increasing the value of the loan/investment as a whole.
Having money to lend, and deciding who to lend money too are two difirent skill sets.
One lender is good a screening people, processing applications and doing the paperwork. This company creates the terms of the loan. But then there’s another company that has a lot of money to lend, but does not want to do all that “work”. So they just buy the loans off the first lender.
This benefits the first lender because they get to do the thing they are good at (paperwork) and send all the risk off to whoever purchases the loan. They get paid just for doing all the work and doing the initial issuance of the loan.
Once they sell your loan, they can use that money to make a loan for someone else (that they will again sell).
So if that first bank has $1,000,000 available to lend, they might lend it 10x by this process of lending, selling the loan, then lending again and selling again. Over and over and over again they issue loans, sell them and then issue more loans.
I wish there was a way to prevent your bank from selling your mortgage. Even if the terms stay exactly the same it’s frustrating to have no control who takes over the payment process. They might have terrible customer service, a slow website, who knows.
In my case we reached out to chase bank for a mortgage. The amount they offered to loan us was laughably small for the market we were looking in. The person on the phone was totally ignorant of the local real estate market and flabbergasted at the cost of even a modest two bedroom house.
We went with another broker who loaned twice what chase offered. A few months later, chase bought our mortgage. Makes no sense to me.
Cash. Usually banks sell mortgages if they can generate a good profit, or if they need cash for liquidity.
A mortgage is an asset, helps to remember that.
A bank is usually good at loaning money. They know how to evaluate risks and set interest rates and such.
After the loan is finished, though, for the next 20-30 years, they’d have to spend time and effort collecting it. That means setting up payments, sending out documents, paying part of the money into an escrow account, using that to pay for insurance and taxes, and all kinds of other stuff. The bank doesn’t want to do that, because it’s all expense with no return.
So the bank sells the loan to another company. That company might not know how to make loans, but they’re good at collecting them. They have a website, and people who spend all day moving numbers around on balance sheets and stuff. They pay the bank a little bit more than the loan is worth, and for the next 20-30 years they’ll take your payments and make a profit.
Sometimes the second company is a bank, and sometimes they’re not. And sometimes that company needs money for something, and they’ll sell some of their loans to another company.
When they sell it, they get more money in return than they loaned you.
So if you borrow $300,000 to buy a home, they give you $300,000 and someone might give them $304,000 for the mortgage. And then someone else might give them another $1,500 for the servicing (the right to collect the payments from you and remit the principal and interest to the mortgage owner). Now they’ve made $5,500 for loaning you money for a few days or a week, that ends up being an excellent interest rate.
Servicing gets transferred repeatedly because it’s a bet on how likely you are to refinance your mortgage in the next few years, and different people may have very different views about the odds of that bet.
There is still risk involved in holding on to those loans. The loan is just a promise of payment in the future. Selling the loan gets you money today.
Imagine you buy a 500k house with a mortgage. The loan has interest so over the course of 30 years you’ll end up paying the bank back 600k. The bank makes 100k but it takes 30 years.
Or, the bank sells that mortgage, which is in theory worth 600k for 550k. So instead of making 100k in 30 years you make 50k in one day and then they move onto the next loan.
The larger banks will buy them up because it’s a low acquisition cost, meaning they didn’t have to do any work to acquire the loan and the time frame is fine because they are a massive bank constantly collecting loan payments from all over the place so it’s a good steady revenue stream.
A lot of the time the actual lender is one of the Mae’s, Sallie Mae Fannie Mae, Freddie Mac. If they brought out your mortgage then they are the lender and that never changed after that.
But they switch “servicers” all the time for reasons I don’t know. Are you sure you’re not confusing who is “servicing” the loan with the actual lender? The terms never change, just the loan number, the address, name to make the check out to, and website change. Also their leniency changes. I had a servicer that would let us pay 29 days late with zero penalty. My current servicer gives 16 days.
I don’t think your loan is getting bought out over and over again.
So here’s how a mortgage works. You decide you want a house. Let’s say the house costs 100k. You don’t have 100k, so you go to a mortgage company. The mortgage company does have 100k, so they buy the house for you, handing the owner 100k. Now they no longer have 100k, but you’re going to end up paying them 300k for the house over the next 30 years. Hurrah, you have a house, and they end up with a 200k profit. Now someone else comes along, and wants to buy a 200k house. The mortgage company needs 200k to buy the house, but only has 100k. So they sell your mortgage to another company for 120k, because they can show you have been making on time payments for the last two years. Now they have 220k, and can buy the house for the second guy, who they’re going to make 400k off of in the same time that they were going to make 200k off you.
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