Why Do Lenders Sell Their Mortgages?

Article excerpt

"Why do most home mortgage lenders sell their mortgages instead of keeping them? I have a problem with negotiating my mortgage deal with one firm over a week, then having my loan sold to another firm that I did not select, and with whom I am obliged to deal for as long as 30 years. Is it possible for me to find a lender who will promise not to sell my loan?"

Mortgage lenders comprise two very different types of institutions. The largest number are mortgage companies, or as they prefer to be called, mortgage banks. Mortgage banks are state-chartered temporary lenders who must sell the loans they originate because they do not have the long-term funding needed to hold them permanently.

Mortgage banks borrow large amounts, but only for the short periods they must hold mortgages before their sale. The unsold mortgages serve as collateral for these loans. As the mortgages are sold, the loans are repaid.

Mortgage bankers need very little capital because they have excellent collateral to secure the short-term loans they need to operate. To hold mortgages permanently would require long-term funding sources, which in turn would require much more capital. That is a different business.

While mortgage banks always sell the mortgages they originate, they may retain the servicing under contract with the buyer. Where servicing is retained, borrowers continue to deal with the same firms that loaned them the money in the first place. Over the years, however, servicing has become quite concentrated among larger firms, and most mortgage banks today no longer service mortgages. They are strictly in the mortgage origination business. The upshot is that borrowers who take loans from mortgagee banks rarely have their loans serviced by the same firm.

The second type of mortgage lender is the depository institution: commercial banks, savings and loan associations, savings banks and credit unions. These institutions are chartered by both the federal and state governments to provide a wide variety of financial instruments to consumers and businesses, including deposits or deposit-type instruments, and many types of loans including home mortgages. Among these groups, only savings and loan associations have viewed themselves historically as being primarily home mortgage lenders, and since being badly burned in this market in the 1980s, their commitment today is not nearly as strong as it used to be.

Depository institutions have the capacity to hold mortgages permanently in their portfolios, if they want to, and some do. …