When you take a loan, the bank can “sell” your loan to an investor. What does that process look like, and why would an investor want to buy loans?

Question

When you take a loan, the bank can “sell” your loan to an investor. What does that process look like, and why would an investor want to buy loans?

In: 5826

Answer 1

Oh wow, I’m uniquely qualified to answer this!

So the interest on a 30 yr loan is a lot of money. Often between 1.5-3x the loan value.

If your mortgage rate is 6%, 4.5 or whatever % is to the federal reserve to “make” that money. Banks and other hands touch it in there, not important now. The final broker gets that 1.5% and it’s based on your credit worthiness. Their goal is to usually profit about 80 basis points or about 0.8%. .2 goes to the loan officer. Usually. I forget the exact margins but that’s close enough for here.

So on a 500k loan, the brokerage is scooping up 5k plus origination fees and some other flat fees.

There’s costs to collecting the loan payment every month. The broker probably doesn’t want to do that. It can be a lot of work and only pays a tiny fee. Enough to survive in volume though, especially if you can manage costs and specialize.

The profit is in collecting that loan long term though. 500k is about 1M in interest. A piece of that goes to the services who is processing collection. The owner of the loan gets the rest of that 1M.

So the brokerage has a list of investors, who buy loans from them. They buy the bulk portion or the servicing rights or both. If you buy the loan, you get a fat accounts receivable line. 1.5M over the next 30 years.

The services gets a flat monthly fee too, for a few hundred dollars. Add this up over time, this is a big deal for both parties.

And you are buying them for a flat fee from the brokerage. A few thousand to buy the loan and servicing and everyone wins.

Most of this is done by email, phone call and spreadsheet. This is why loans get lost all the time. The industry is very resistant to software because this can all be automated. It would lead to massive massive reductions in headcount and ancillary staff.

Most loans are “sold” before the paperwork is even signed.

And none of this money here really matters because it’s all made up anyway.

Fanny and Freddy are the biggest buyers of these mortgages.