Why Lenders Sell Loans

Written by Posted On Monday, 29 June 2020 05:00

It’s almost an automatic for someone getting a conventional mortgage. It’s a letter that arrives in the mail called a “goodbye” letter in the mortgage industry. It’s a letter that states the existing mortgage is being sold. This is followed by a “hello” letter from whoever bought the loan. It might frustrate some or even wonder why their mortgage company sold the loan in the first place. For someone that does most of their banking at one institution, that might raise a few questions. A homeowner might have a mortgage, credit card, auto loan and checking account at the same bank. That homeowner has used the very same bank for nearly 20 years and now the loan is being sold? Where’s the loyalty?

Without having the ability to sell mortgages, the lending industry would essentially shrivel up and die. Why? Think of it this way- say a bank had $10 million in the vault dedicated to home loans. If after making 10 $1 million dollar loans, the bank has no more money to lend. Instead of selling the loan, the bank would recover it’s money by collecting principal interest payments each month, but that can take a long, long time to recover the issued funds. 

Instead, banks and mortgage companies in general operate from a standing line of credit. This process keeps the lender in the lending business and provides much needed liquidity in the “secondary” markets. The secondary market is where mortgages are bought and sold among various entities. Most conventional loans are sold and ultimately end up in the hands of Fannie Mae or Freddie Mac. That still doesn’t mean you’ll send your mortgage payments to Fannie or Freddie; they just own the note. If someone sends a mortgage company to the bank, the bank acts as a “servicer” and collects a fee for managing the home loan for the owner of the note.

When lenders first accept a home loan application there is a fair amount of paperwork exchanged. Beyond the loan application and supporting documents such as tax returns and paycheck stubs, multiple disclosures are provided to the borrower explaining various parts of the loan process. One such part is whether the lender intends to sell the loan and provide historical information how many loans have been sold. This document is titled the Mortgage Servicing Disclosure Statement and there are different boxes to be checked stating the lender has sold 0-25%, or 25-50% or even 100%. Most conventional mortgages will show that most all loans generated are sold. Loans that aren’t sold fall into the “portfolio” category, so-called because the issuing lender does not intend to sell the loan but keep it in-house, or in its portfolio. 

Selling a loan doesn’t affect the homeowner whatsoever, other than the monthly payments will likely be sent to a new servicer. Nothing in the loan changes and the party that buys the mortgage cannot change any aspect of the note. The terms are still hard-wired into the note, the only difference is where the monthly payments go to each month. So, when someone receives a “goodbye” letter, it just means someone else bought the outstanding mortgage.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.

www.cdreed.com

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