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?
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An investor might want to own an asset with a certain amount of returns over a certain period. For example, a pension fund might need to have a 3% return on an investment of $50million dollars over the next 5 years in order to meet their obligations.
Pension funds, though, don’t have the ability to originate loans. Banks, knowing this, can make a bunch of these loans in smaller amounts and package them into a $50 loan resale to the pension fund. The bank earns fees along the way and also get to make more loans once they sell the $50m to the pension fund (since they’ve received the money and offloaded the risks)
The pension fund gets their investment requirements met as well.
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