Why Do Mortgage Lenders Sell Mortgages?

If you have recently purchased a house, you may have received a notice that your loan has been purchased by a different company. You may have been confused or alarmed by this, especially since you have worked very hard to obtain this loan through your original lender. But loan sales are a very common occurrence and may be due to a number of business purposes. For example, borrowers looking for a reverse mortgage loan in South Carolina may also encounter similar loan sales after closing.

As mortgage brokers at BrickWood Mortgage, we are often asked questions about this phenomenon by our clients. To help ease your mind and explain what this means for your loan, we will explore why this happens and explain these three basic reasons below.

So, why do mortgage lenders sell mortgages?

1. Replenishment of Funds for New Loans

The primary, most basic reason that mortgage lenders sell loans is to free up more funds for additional lending. If a bank or credit union sets up your mortgage, they lock up a considerable sum of money, sometimes as much as hundreds of thousands of dollars, for as long as 15 to 30 years.

By securitizing, or reselling, the loan to investors or government-sponsored entities called Fannie Mae or Freddie Mac, banks can recoup most of their investment immediately. By getting this fresh source of funds, they can continue originating other mortgages, and thus, their business is kept thriving and growing.

Consider this scenario, referring to it as a revolving door of capital. Why do lenders sell mortgages? Without mortgage sales, many banks would soon run out of capital and be unable to assist people purchasing homes. Of course, this is ultimately good for the housing sector because they would always have mortgage finance available.

2. Risk Management and Stability

Although they are held for such a long time, there are many risks that can adversely affect lenders’ financial stability when they issue mortgages, including changes in interest rates, economic downturns, and defaults on payments by borrowers.

When banks sell their mortgages, they can pass on a large part of this risk to the acquirer of these mortgages. It helps them have a predictable and manageable risk profile on their balance sheet. They no longer have to worry about what can potentially go wrong in a large number of mortgages over a period of time and can continue doing what they do best, i.e., originate high-quality mortgages.

And we have had to explain to our clients, that why lenders sell mortgages is often to transfer risk, and it does not decrease the value or validity of their loan, but that this risk is merely being passed on to a party that is better suited to managing these mortgage risks on a longer-term scale.

3. Producing Simultaneous Revenue Streams Through Servicing

Lenders often retain these servicing obligations when they sell their mortgages, thereby providing them a secondary income source, too. Mortgage servicing is responsible for collecting payments, processing and managing escrow funds, addressing customer inquiries, and implementing loan modifications if required.

Servicing fees, a small percentage of the loan balance, are collected by the lenders for these tasks. Thus, they get an opportunity to have a relationship with borrowers and earn income from already sold loans.

But for borrowers, this typically means little or no interruption of service. You would continue paying bills as before, to the same company, and interacting with the same customer service personnel, albeit operating under a different ownership for your loan.

Your Mortgage is Still Valid and Secure

Knowledge about mortgage sales practices may ease any worries you may have about mortgage sales. Your loan agreement, rate of interest, and payments will remain unchanged despite changes in ownership of your mortgage. Government rules and regulations safeguard you or any other customer throughout this ownership transfer process.

As mortgage specialists, BrickWood Mortgage is committed to walking you through all that mortgage financing entails, including explaining these typical mortgage market practices.

When banks sell their mortgages, they’re only utilizing shrewd methods of conducting business that ultimately help create a healthy mortgage market that can benefit everyone!