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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The bank sells off a large lot of things at once like mortgages to reduce the liability it has on its books. This usually happens as we approach the end of the banks fiscal year so they can make the books look better than they are.
The reason a bank loans you money, is because you guarantee to pay it back plus some interest over a long stretch of time. If the bank wants to quickly unload the liabilities, they may sell to someone who is willing to wait long term to collect the interest. So the bank sells a large group of loans to investors for the original capital plus a small % to at least recoup what they have put out.
The investor then gets a large grouping of loans that will pay them the money back plus the interest over time. So their benefit is the collection of the interest. The other potential benefit to the investor is that they are now in line to collect whatever asset you used as collateral – particularly houses.
In a long term market, real estate goes up. So a company that buys a bunch of risky debt on real estate could potentially make more than they would have collected by repossessing and selling or repurposing the asset.
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