Why Lenders Sell Loans
Written By: David Reed
Tuesday, July 14, 2020
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 its money by collecting principal interest payments each month, but that can take a long, long time to recover the issued funds.nbsp;
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 doesnt mean youll 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 arent 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.nbsp;
Selling a loan doesnt 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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