Why Your Mortgage Was Sold

The mortgage market consists of two sub-markets, the primary (or retail) market and the secondary market. When an individual applies for and is approved for a mortgage by a lender, they are dealing in the primary market.

The secondary market is the market for closed mortgage loans whereby retail lenders, like banks or mortgage companies, sell their closed loans to investors. These investors either retain the loans they purchase on their balance sheet, or bundle them with other closed loans and sell them as part of a pool to an Agency (i.e. Fannie Mae or Freddie Mac) or to institutional investors such as pension funds or endowments.

Regardless of whether your loan is sold, the lender purchasing it cannot change its terms. Your rate and monthly payment will remain exactly as they are documented in your loan agreement and only the address where you send your payments will change.

So back to the question of why does your lender sell your loan? Let’s start with the easy part first. If you received your loan from a mortgage company like Quicken Loans, Mortgage Master, or really any company that has “Mortgage” in its name, these companies do not have depositors (like a bank) so they must temporarily finance the loans they make with a line of credit (called a warehouse line) that they receive from a bank. Most warehouse lines have provisions for loans to be sold within 30 days of being made.

Banks, on the other hand, have balance sheets and access to deposits to finance loans, so the bank has the option to either keep your loan on its balance sheet or to sell it. This decision can be complex and is based on numerous factors including a cost/benefit analysis of keeping vs. selling the loan. This analysis may take into account factors like the interest rate the bank will receive from you, the cost to originate the loan, the price they can receive in the secondary market, how quickly the bank thinks you’ll pay the loan back and how much a bank must pay its depositors.

For banks that retain loans, their income is the difference between what they earn on your loan minus the interest they pay to depositors. There are also more qualitative factors that come into play such as how much exposure a bank wants on its balance sheet to residential loans and if they have a department dedicated to servicing loans.

One interesting wrinkle is the ability that lenders have to sell your loan, but still retain the servicing of your loan. Servicing is the ongoing management of a loan’s billing, payment collection and escrow account management. This occurs most often when banks choose to sell their loans to Fannie Mae or Freddie Mac. While the Agencies will purchase loans from lenders, they do not have the capability to service these loans. So a lender can sell a loan to Fannie for example, but keep the servicing.

This feature is valuable for many local banks because the loan sale allows them to replenish their capital to make new loans, but maintain the customer facing activities. In fact, a borrower whose loan is sold to the Agencies may not even be aware since they will continue dealing with the institution that made them the loan in the first place. In exchange for selling the loan “servicing retained” the lender receives a smaller fee upfront from the Agency, but receives an ongoing payment to service the loan.

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