why does lenders transfer loan/mortgage and what’s in it for them?
In: Economics
The loan is sold for many reasons, and bought for many reasons. Once there is an established loan contract with a qualified borrower with terms in place, the loan becomes an asset to be sold or traded just like anything else.
They get cash now.
So they originate a $100 loan and get paid $5 in closing costs then let’s say you’re going to pay $5 in interest a year for the next 30 years. That’s $150 in interest. But they could sell the loan for say $100 principal plus $50 for future interest now and then they can reloan out that $100 plus now they can loan out that $50 they got for the future interest. Now they originate another loan for $150 and make $7.5 in closing costs. Now they can keep scaling their business in making money off of the closing costs as well as part of that interest that they got paid.
The company that bought the loan basically gets to not have any staff relating to selling loans and now has a steady revenue stream where they’ve investing $150 and they’re assured to get $250 over the next 30 years.
Obviously my numbers are pretty far off, but that’s the general idea.
Some lenders really specialize in acquisition but don’t really want to hold the mortgage long-term. There’s a lot less risk in getting someone to sign a mortgage but then lay it off to someone else (at a reduced value) for the long-term.
You lose out on collecting on the mortgage for the next 30 years, but, you also don’t have to deal with the risk that the borrower will default.
Even if a lender does want to hold on to a mortgage for the full term, they will still seek to balance their portfolio, not too much commercial lending, etc.
There is still value in closing the loan because the initial lender gets the points from the transaction and a fraction of the long-term interest in the sale to the other lender.
If you owe me a certain amount of money at a certain interest rate, it’ll take me a certain amount of time to get paid.
If I want money available sooner, I can sell your debt to someone else: they pay me, and you owe them now.
They pay me immediately, so I’m happy—I have money in my pocket to work with. They might offer you a lower interest rate—your loan/mortgage payments might be lower with them than they were with me. They still make a profit from you, because the interest rate is still *something*, so they’re happy as well.
if you are locked in with a super low rate and are not likely to refinance that means the lender is locked into that low rate too. so if you run a small lending company and you have a significant fraction of a million dollars tied to a<3% interest, but new loans cost ~6%, you can sell that low rate loan to someone else who is happy for the 3% guaranteed (big banks) so now you have that money to go loan out for a higher rate. as a smaller business your capital is limited and so you need to chase the higher rates, where big banks are more stable and will take up the low rate loans as a cornerstone of income, while still having the capital to go after new high rate loans too. I am quite sure anyone with a >6% loan is not getting sold to other lenders.
So it turns out that mortgages aren’t much different than a corporate or government bond, at least from the perspective of an investor like a large pension or mutual fund. This breed an industry where mortgage lenders would originate the mortgages, then sell them to investors, similar to how a government borrows money by selling a bond to an investor.
Say I am a lender who specializes in originating mortgage loans. I have $1 million dollars to make loans. I can make ten $100K loans, collect the origination fees, and then what do I do? Fire all my mortgage underwriters and wait years to originate any more?
Instead, I pocket the fees, sell the loan to get my capital back, and originate more loans, again and again. I make money off the fees, and off any amount more than the loan amount that I get when selling them (which will depend on the loan’s interest rate and what rates are when I sell it).
People who buy the loans are long term investors wo want a safe long term income stream, either to be included in mortgage backed bonds, or as a direct loan investment by a fund that holds loans.
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