Aren’t banks trying to make money like every other business? If ROI on mortgages is only 2.5%, but market investments are 7%+, why do banks lend out mortgages at all? Is it a low risk thing? How do banks decide how much of their portfolio goes toward lending out mortgages?
In: Economics
Also keep in mind that most banks that lend for mortgages don’t keep the loan, at least in the US and I assume it’s similar elsewhere. So, let’s assume you borrow from a smaller, local bank to buy a home. They lend you the money, the loan “closes” (everything trades hands, you end up with the keys, the seller ends up with a check, etc.) Remember, this is a small bank, and by rules they have to keep a portion of money in reserve to cover outstanding loans, so if they keep the loan in house, at some point, they don’t have any more money to lend because it’s all tied up in reserves. So, they sell the loan to say, Bank of America or Chase, much larger banks with much larger reserves. The debt is completely cleared from the local bank, and the last you will hear from them is receiving a letter that says X bank is now your servicer and you will make payments to them. Even these bigger banks are likely to divide the loan into two parts, servicing and holding. The servicer accepts the payments, manages the escrow fund to cover insurance and taxes and the like, etc and then passes the principle and interest on to the holder. If the local bank sold to Chase, Chase likely keeps the servicing. They charge a fee for such services to the holder on a month to month basis, and servicing a million loans isn’t much more taxing than servicing one hundred. They sell the holding, though, to Fannie Mae, Freddie Mac, or Ginnie Mae which are government backed, or private investments looking for low-risk investment. This is usually done in large lots called mortgage backed securities. So, you get a house, the local bank gets a one time payment for selling the loan plus fees charged at closing, Chase adds another loan to its servicing portfolio, and some large, well funded group adds to their portfolio of highly safe investments.
Latest Answers