Why Do Mortgage Lenders Sell Loans?

Why lenders sell mortgages

The bank you worked with to issue your mortgage may not be the same bank that actually services your loan. It’s extremely common for lenders to sell mortgages they recently issued; in fact, more than 70% of mortgages are sold.

“Lenders typically sell mortgage loans to free up capital and mitigate risk, allowing them to offer new loans,” explained Matthew Sanford, assistant vice president of mortgage lending at Skyla Federal Credit Union. “This practice also ensures that funds remain available for new borrowers.”

While they could make money over the life of the loan, many lenders want to make money from fees for originating the loan, not by waiting for 15 or 30 years for interest payments. Also, servicing loans is a large undertaking, which includes maintaining escrow accounts, customer service channels and payment processing. Not all lenders are equipped to handle this.

If your lender sells your loan, you will be notified of the sale and provided with new payment information. The details of your loan will not change. Your interest rate, term and other loan details will remain exactly as you agreed to them in your loan documents.

What changes is the address to which you send your payment, and the company you will need to contact if you have problems or questions.

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How lenders benefit from selling mortgages

Lenders sell mortgages to free up cash and reduce their risk. Freeing up cash allows them to either issue new loans or keep it on hand, thereby increasing the bank’s financial strength. Here’s how your mortgage lender benefits from selling loans:

• Reduces risk: Selling off mortgages reduces the original lender’s risk if borrowers default or miss payments on their loans.
• Increases cash reserves: A bank’s financial strength is measured, in part, by how much cash it has in reserve. A bank can appear unstable if its cash reserves fall too low, and selling outstanding mortgages is a way to quickly generate cash inflows.
• Available funds for more loans: When lenders sell mortgages, they have available funds to generate more loans. Lending out more loans means they can charge more origination fees and other closing costs.

Let’s look at a small-scale example: If a bank has $10 million with which to issue mortgages, it could issue about 30 mortgages around $330,000 each. Once those were issued, it would have to stop lending until some of that money was repaid. Which means it could issue about one mortgage a year.

But if it can sell those 30 mortgages to Freddie Mac or Fannie Mae, it can immediately issue another 30 mortgages. This makes home loans more affordable and accessible to borrowers like first-time homebuyers.

Who buys mortgages?

Government-sponsored enterprises (GSEs), such as Freddie Mac and Fannie Mae, buy mortgages to keep the mortgage market moving. Typically, mortgages are bundled together, thousands at a time, and then private investors buy mortgages from GSEs to collect interest from borrowers and earn money.

For example, Fannie Mae buys single-family mortgages from around 1,200 private lenders and institutions and packages them together in mortgage-backed securities (MBS). Investors can then buy these securities as an investment to earn yields and build out their portfolios.

What is the secondary mortgage market?

Any transactions involving the mortgage after its origination take place in what’s considered the secondary mortgage market.

Mortgages are grouped together into mortgage-backed securities and sold to investors or government entities. Mortgage-backed securities, or mortgage bonds, can then be bought and sold by investors.

“Securitization involves combining numerous individual mortgages into a financial product, which is usually sold to external investors,” Sanford said. “This process is vital because it ensures a continuous flow of funds for new mortgages, contributing to maintaining low and stable mortgage rates.”

These are valuable investments, since the investor’s risk is spread out over thousands of loans, each backed by the individual property securing the mortgage.

What to do if your mortgage is sold

When your loan is sold, your lender will provide you with a notice of the sale. The terms of your loan will not change, but where you send your payments may.

If you receive notice that your loan was sold, you should:

• Confirm the official transfer date
• Note the name and address of your new loan servicer
• Double-check that your loan terms are the same
• Confirm that there are no changes to your escrow information

If you have a new loan servicer, it may offer different payment methods than your previous servicer. For example, it may have an online portal.

The new servicer will also provide customer service, so be sure to reach out if you have any questions. If you use a mortgage broker, they may also be able to answer any questions you have.

When asked what a borrower can do if something goes wrong during the transfer, Sanford advised that borrowers have a 60-day grace period during which they won't be penalized for mistakenly paying the old servicer. “Additionally, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) if the servicer doesn't resolve the problem,” he said.

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