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Why Do Banks Sell Mortgage Loans?

Written by: Kristy Welsh

Last Updated: August 15, 2017

A notice arrives from your mortgage company advising you they are selling your loan to another company. Why did this happen?

Types of Lenders

First we need to distinguish between the two types of lenders: Mortgage Banks and Depository Institutions.

Selling Mortgages - Why Does This Happen?

So, why are you getting this notice that your loan has been sold to another institution?

  1. They need to keep a large enough pool of money on hand to make loans to other people. For example: If they lent out 50 million dollars over a period of 10 years they would need to have started out with a half a million dollars of cash. How will they keep on lending? Most mortgages are for 30 years, effectively tying up that money for this amount of time.
  2. They make more money this way. Mortgage bankers make a commission when they sell your loan to another company. If a banker makes a point on a package of loans worth a million dollars, he makes $10,000 dollars (1 percent of $1,000,000) in immediate profit by selling them. The banker then has freed up one million dollars which he can re-loan to other customers. If he writes $1,000,000 in new loans this month, he (or she) can make another $10,000 dollars in points by selling those next month.

So, if $1,000,000 worth of loans are sold each month, the banker would net $120,000 for the year on those points alone. Compare this to holding onto the loans. If he keeps that same $1,000,000 in loans and earned interest at say 8 percent, he would earn $80,000 in a year on that same million. It becomes clear that selling loans is more profitable.

Selling off the loans every month: 12 x ($1,000,000 x .01) = $120,000

Keeping the loans and collecting the interest paid: $1,000,000 x .08 = $80,000

Who is Buying and Selling These Mortgages?

These mortgage loans 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, 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 likelihoods.

The secondary mortgage market exists as a source of money for banks to lend out to home buyers in every state. This is done in two ways:

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