Why do the banks keep selling my
You probably already encountered the situation: A notice arrives from
your mortgage company saying they are selling your loan to another
company. You have been in your home less than 5 years and your loan
has already been transferred 3 times.
Why does this keep happening?
There are few good reasons for lenders to sell your loan.
They need to keep a large enough pool of money on hand to make loans
to other people. Most mortgages are for 30 years. Sure a bank may
have 200,000 dollars to loan you for your new dream home. But multiply
that amount by 100 homes/month over 30 years, and you'll see that
the bank would need to start with over 7 billion in cash. So banks
sell their loans to free up cash for new borrowers.
They also make more money by selling their loans. Banks make a commission
when they sell your loan to another company.
Let's look at an example:
If a bank makes a "point" on a package of loans worth $10,000,000,
they make $100,000 (1% of $10,000,000) in immediate profit by selling
them. The bank has then freed up $10,000,000 which they can now loan
to other customers. If the bank writes $10,000,000 in new loans again
the next month, they can make another $100,000 dollars in points by
again selling their loans.
So, if $10,000,000 worth of loans are
sold each month, the bank would net $1,200,000 for the year on those
points alone. Compare this to holding onto the loans. If they keeps
that same $10,000,000 in loans and earned interest at say 7%, they
would earn only $700,000 in a year on that same $10,000,000. It becomes
clear that selling loans is more profitable.
Selling off the loans every month:
12 x ($10,000,000 x .01) = $1,200,000
Keeping the loans and collecting the
$10,000,000 x .07 = $700,000
So where do the banks sell these loans?
They are sold on the secondary market,
which mainly consists of two organizations, Fannie
Mae and Freddie Mac. The secondary
market is the place where mortgages are bought and sold by various
investors. Secondary market investors include Fannie Mae, Freddie
Mac, various pension funds, insurance companies, securities dealers,
and other financial institutions. All of the loans sold to Fannie
Mae and Freddie Mac must meet certain guidelines for credit worthiness
and repayment likelihood. They issue what are known as Mortgage-Backed
Securities (MBS) in exchange for pools of mortgages from lenders.
These MBS provide the lenders with a more liquid asset to hold or
sell. Fannie Mae MBS are highly liquid investments and are traded
on Wall Street through securities dealers.