Don't most lenders sell their Loans?

Question

Help me get this straight...if most lenders sell their Mortgage notes (ala--Countrywide, First Option, Aegis) to other investors, how are they now losing money over home purchases? I know many Companies service the loans, but isn't the new investor, not the initial lender, that is now taking the hit?

Answer 1

The larger mortgage companies that you are talking about actually purchase large portfolios of loans from smaller companies.

Answer 2

ALL lenders sale loans, with (in house loans being the exception), All lenders who you pay are Servicing Lenders, they collect your pmt. retain 8%, and forward the bal. of the pmt. to Fannie Mae, Freddie Mac, or Ginne Mae. Most consumers are not aware that Lenders do not have the capacity to hold the large sums of capitol for an extended amount of time. These enities I mention , actually hold the balance of the mortgages, with the lender as the responsible party to service and collect the pmts. Servicing lenders can sell the loan to other servicing lenders, and do so, if they are in need of immediate opporating capitol. Any mortgage can be sold at any time to another lender who is in need of increasing their servicing portfolio, and has the capitol to purchase them. That is why you see some loans changing lenders 2, or 3 times in a year! To answer your specific question, what has happen to date is the servicing lender is finding the loans purchased from mortgage brokers (they do not service in most cases), are defaulting, and the servicing lender requires the broker to re-purchase them. The broker is contracted to do so, if the servicer has found violations in the original loan, and/or accompaning doc's. That being said a lot of these loans are sub-prime and after they started to default, they were audited, and returned to the broker. The brokers, for the most part, are folding, which leaves the servicer with a bad loan, ergo the implosion. Hopes this helps.

Answer 3

Two types, one is the in-house loan in where the loan is not sold in the secondary market and the other is usually under government requirements in where those loans are sold to investors in the secondary market. The profits in the loans are determined by the difference between what the bank's interest was when they borrowed the funds (they can borrow at a much, much lower rate than you or me from the feds) and what the rate they loan the amount is. In addition they charge points and other fees to recover cost and overhead in the front end. However if a loan is classified as a trouble loan by an auditor then the lender must go to their reserves where all the banks profits are and that they use to gain more profits and place a certain amount or all of the amount of money they originally lent and they can not earn interest nor use that money nor show it as an asset in their books to determine book value of their bank stock, that hurts, until the loan rating is resolved by either the government guaranteeing agency takes the loan or the loan is foreclosed and the property is sold. Ultimately the purchase of the loan by an investor was done at a discount so some cushion exists until the loan is foreclosed and the property is sold, assuming that the property valuation was done properly and the equity of the borrower was sufficient.

Answer 4

This is the simple explanation . . . Ted buys a house. Ted's bank agrees to give the seller full contract value (or 100k for this example). The seller now has 100k and the lending bank has an asset valued at 100k plus interest over life of loan. Ted is the only one with debt (which is secured by the home). The bank then sells the loan to another institution and generally keeps a servicing fee of about 1 to 2% interest. The institution now has a scheduled income stream of 100k plus balance of interest for the expected life of the loan. THE INSTITUTION CAN BORROW AGAINST THIS ASSET. THE MORT. THE INSTITUTION PURCHASED IS NOW PART OF THE INCOME STREAM. The bank which sold the loan to the institution now has it's original 100k back plus it's servicing fee. So, when Ted defaults on a loan not only does his bank loose the option to re-lend his 100k plus servicing fee . . . the institution which bought Ted's note now looses income. Essentially - the banks sell the notes to re-lend the money to other borrowers and the institution buy them for asset backed income streams.

Answer 5

Some do, some don't. When a loan goes into default, the holder of the note takes the hit in most cases. The original lender may take a full or partial hit if the sale was with recourse and / or if the note is within the audit window and the audit busts.

Answer 6

Depends on the lender, if it is a bank, yes they do sell the note.