How do they sell on a mortgage ? If Bank A sells the mortgage how does bank B or C end up with it ?

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One Response to “How do they sell on a mortgage ? If Bank A sells the mortgage how does bank B or C end up with it ?”

1. I Buy And Sell Houses on: 22 June 2009 at 4:41 pm

   To oversimplify:

   You get a mortgage from Bank A. Let’s say it’s a 30-year fixed mortgage for $100,000 at 6%. Bank A is also “servicing” the loan–doing the recordkeeping, sending you statements, etc.

   Interest rates stay at 6%.

   In two months, Bank A decides to sell the mortgage. It’s still really a $100,000 mortgage; very small principal has been paid on it and it still has 358 months to run. But, Bank A really can borrow money to lend out at 3%. It borrows at 3% and lends to you at 6%. So it finds Bank B and says: “I’ll sell this mortgage to you for $95,000.” Bank B is fine with that; the yield will be more than 6%. Meanwhile, Bank A continues to service the loan, making some money that way. And it gets more cash to lend out.

   As a practical matter, Bank A will bundle a large number of those mortgages together; they don’t sell them one-by-one. And they get more money for bundles consisting of borrowers with higher credit ratings. They get less money for bundles consisting of borrowers with lower credit ratings. But it all should even out, because they charged the excellent borrowers less for the mortgage than they charged the poor credit borrowers.

   As a side note, the current financial meltdown goes back to lenders bundling a large number of poor quality loans, then selling those loans (along with supposed guarantees) to other lenders. The guarantees were no excellent, and a large number of those mortgages went into foreclosure. (Yes, for those of you who really know what happened, I realize how over-simplified that explanation is.)

   As for why a bank would buy a mortgage if their staff had never met the lenders–you mean the borrowers?–why would they need to? It’s all just numbers. Your water or gas company has never met you. When you place a phone order online and the person taking the order is in India, they’ve never met you. It’s about your credit score and credit history. It’s about your history of repayment. It’s about income-to-debt ratio. It’s all numbers.

   That’s why lenders are having such a hard time with small sales and foreclosures. Their processes aren’t set up to deal with human emotions or human variables. That’s not a criticism, just a fact.

   That’s it in a nutshell.