What, again? Your mortgage has been sold. What a pain. Why doesn't someone just hold onto the loan like they did in the old days?

Good question. Why do lenders keep buying and selling mortgages? The answer may be one of the reasons interest rates are more competitive than they used to be.

Many moons ago, the federal government created quasi-governmental agencies that we today call Fannie Mae and Freddie Mac.

Fannie and Freddie's sole purpose was to provide "liquidity" in the mortgage markets. In other words, if a bank or mortgage lender made lots of loans, they could sell those loans to Fannie, Freddie, or any other buyer.

Why would a local lender sell its mortgages?

Imagine that a local lender created mortgages worth $10 million. Now imagine that the lender only had $10 million. With no more to lend, the lender is out of the lending business -- unless it can find new cash.

One way to get new cash is to attract more deposits. But a quicker and easier way is to sell loans. Freddie, Fannie and other organizations buy mortgages and so the local lender once again has more money to lend.

The catch is that Fannie and Freddie don't want just any loan, they want mortgages that meet certain standards, what we call "conforming" or "conventional" financing. As more and more lenders enter the marketplace by issuing conventional mortgages, the obvious result is more competition. This competition now helps to keep rates competitive from lender to lender because consumers have more choices.

How do lenders make money when they sell mortgage loans?

Two of the more important ways are by collecting the interest accrued on the loan or by selling the loan.

If your mortgage pays your lender 7 percent interest on a $100,000 original loan, your lender could make money over the long haul by collecting interest each month. Over the life of a 30-year loan, the lender would make almost $140,000 in interest. This money-making method is pretty obvious, but the lender also has to wait an awfully long time to collect this profit. Moreover, such profit may not be realized -- loans rarely last thirty years, so lenders rarely collect all potential interest.

Another way for lenders to profit is to sell their mortgages.

Let's say your lender needs more cash to make more mortgages, so they sell loans to an investor. The local lender now has more cash, and that cash means that more loans can be made and more fees and charges generated.

Sometimes cash-rich lenders prefer to buy loans rather than sell them. This way they can hold loans in their portfolios, collect interest and -- if they hold loans for other investors -- they can also collect servicing fees.

Within the lending industry there are specialists who determine when to buy, sell, or hold loans. Such folks are called secondary market managers and their job is to maximize lender profits by picking the right loan strategy.

What choices do secondary money managers make? It depends on the lender's goals, current interest levels, the cost to hold and service loans, and projected future interest rates. This is a risky business because no one knows where interest rates will be in the future and a wrong guess, er, projection, could cost a lender millions of dollars.

If you've had a mortgage in the previous 5 to 7 years and rates have gone down, you've probably refinanced your loan. Suddenly, a mortgage that was supposed to yield your lender a safe $140,000 or so over 30 years has vanished. Back to the drawing board. If a lender guesses wrong about future market trends too often, or carries a portfolio of high-interest mortgages when rates are going down, the lender loses money. Lots of it.

What If Your Loan Is Sold?

It's entirely possible that your mortgage will be sold. Upon the sale of your loan, the lender has new obligations to you under the National Affordable Housing Act of 1990. According to the Federal Trade Commission, these obligations generally include:

• Lenders must inform consumers whether they intend to sell the mortgage servicing, and to notify consumers at least 15 days before the effective date of the transfer of the loan servicing.

• The new servicer has to write consumers within 15 days of the transfer to disclose certain information, such as when it should begin receiving monthly payments and who consumers can call if they have any questions or problems.

• The act also says that during a 60-day grace period after the transfer, consumers cannot be charged a late fee for mistakenly sending their payments to the old servicer instead of the new one.

• Further, the act requires the new servicer to send consumers a statement that the transfer will not affect any terms or conditions of the mortgage, except those directly related to the servicing of the loan.

For more articles by David Reed, please press here.

Published: February 8, 2001

Use of this article without permission is a violation of federal copyright laws.

, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.