1. Mortgage companies have a number of different factors pushing them to either sell your loan or to keep your loan. It really does not matter what company you do your mortgage with, it will more than likely be sold a number of times over the span of the time you have the loan. There is not a home owner out there who always wonders why this happens. It is nothing to be worried about because your mortgage is a contract and the terms cannot be broke. If you do not know what a secondary market is exactly then let me try to explain. It is the financial market where securities (mortgage notes) that have already been issued by private or public offerings are traded. This secondary market is commonly called the Stock Market. Investors are buying and trading everything there.
2. It always comes back to money. Your mortgage note is worth a lot of money to investors and other banks. The banks and investors are getting pushed by the share holders to go out and make a great return on their money which was invested with the bank. The share holders own stocks and invest with the banks to earn dividends and stock value. In the financial sector the banks are limited with mortgages to what kind of rates the loans are making. The banks know that they cannot earn a huge rate of return because most mortgage notes they hold are in the 4%-8% range. After paying all of their employees salaries, overhead costs, and others the banks only make probably half of what the mortgage is. Still it should be a great money maker for them when people are paying their loans.
3. Depending on the goal of the particular mortgage company they could be their to make a quick profit and originate the loans and sell them or originante the loan and hold onto the note collecting the interest. Both business models by each mortgage company has its advantages and disadvantages.
4. Mortgage brokers and large correspondant lenders originate the loans and sell them to larger banks, investors, and hedge funds. Each mortgage out there has a price tag for the mortgage company to earn. How it usually works is on a conventional 30 year fixed rate mortgage where the potential home owners are doing a full documentation loan, the mortgage is worth 2%. What do you mean by 2%. Here is how it works. The mortgage company has a working agreement with a larger bank or hedge fund and the bank says they will pay them a 2% premium for that kind of loan within 30 days of closing. On a $100k loan x 2% = $2k. The $2k represents what the larger bank pays the smaller mortgage company to but it from them so the larger bank can earn interest on it. If you start adding up the amount of loans a mortgage company originates in a month this revenue can start adding up. Major mortgage companies like Quicken Loans will normally do $2 billion a month in new loans. So that’s $2,000,000,000 x 2% = $40,000,000 in revenue for the company. And Quicken isn’t even as big as Countrywide, Chase, and Bank Of America. These companies originate in the $5-$10 billion a month.
5. During the past 12 months all we have been hearing about is the subprime mortgage mess. It really is quite the mess. Can you guess what kept the wheels turning on the subprime mortgage train? If you guessed money than you are right. A subprime mortgage is worth a lot more than a convention mortgage on the secondary markets. The hedge funds and banks were buying these up left and right because the interest they could earn by holding onto the loans was typically 2%-4% higher than the conventional loans. To make a deal with the mortgage brokers and other mortgage companies these larger banks said they would paid them a 4% premium to sell the loan to them. Now you have that same $100k loan x 4% = $4,000 in revenue for the mortgage company. I hope you see why now you heard about so many shady mortgage brokers and mortgage companies trying to steer you into a subprime loan. It was twice as much revenue for them for the same amount of work. Depending on what kind of subprime loan it was some large banks were even offering up to 4.5% premium. Imagine the example above with monthly revenue of $40 million dollars and times it by two. Twice as much revenue for the mortgage company.
6. When the company that originates the mortgage sells the loan they are usually paid within 30 days from the larger bank in one lump sum for all of the loans that were bought. Typically most smaller mortgage companies had one company that bought all of their 30 year fixed mortgages, one that bought their adjustable mortgages, and one that bought their home equity lines of credit and so on and so on. This made for a easy and fast transaction between the two companies.
7. When the loan is sold and the new mortgage company owns the note you will receive a letter in the mail within two weeks or so after closing saying that the loan has been transferred and the new company will be accepting your mortgage payments. Nothing changes with the terms of the mortgage so you have nothing to worry about. Just send your payment to the new place and that’s it. What also happens is the new mortgage company is on the line in case you go into foreclosure. This is where the risk and reward factors step into place for the mortgage companies.
8. So the mortgage company that did your loan sold it within 30 days and make a quick profit that was paid by a larger bank. Let’s use the $100k example with a conventional 30 year mortgage. This made the original mortgage company $100k x 2% =$2,000 in revenue. The new bank will start earning the interest you pay with your loan. Let’s say you are paying 6% on your 30 year mortgage. Over those 30 years the larger bank will earn $115,838.19 in interest that you paid to them on the original $100k. That’s right you will pay $215,838.19 for your $100k loan over 30 years. Sucks seeing that even if you do get to write off some of the interest on your taxes. Every single month your payment on this loan is $600 of which $500 is interest and only $100 goes towards the principal. The larger bank will break even on the 2% premium it paid to the smaller bank on month 4 and from there on it justs collecting your $500 a month in interest. Doesn’t this kind of make you want to be a bank? Just go out there and collect about $2 million dollars worth of loans and live off the interst people are paying you. If you had $2m in loans at 6% you would earn $10,000 in interest every month and earn $2.3 million dollars in interest over 30 years. I think you could live off of that.
9. Your probably asking yourself why would anybody want to be the smaller bank and just sell the loan when the math comes out that they are losing out on so much money over the life of the loan. It is easy to see that the larger bank is going to make a boat load of money just cashing your monthly mortgage payment and doing nothing else. The mortgage company is not mowing your lawn, fixing the side walk, or upgrading to new windows. You would think they should do it because they technically own the home. You just make payments. The reason is because of risk.
10. As this mortgage debacle is and has been playing out from 2007 to the present we can see that the larger mortgage companies are the one’s getting shafted. Their stock prices have plummeted and are having to write off billions of dollars in bad loans. They are not bad loans to say its just that the home owners decided to go into foreclosure and not pay them back. The smaller company is in the clear as long as the home owners do not foreclose in the 4 months following the closing date. Most small and large mortgage companies have an agreement in which as long as the home owner makes 4 consecutive payments on the home and does not go into foreclosure or refinances that loan then all responsibility is now the larger mortgage companies. This agreement is called the “recapture period.” Now the larger mortgage company has to manage the property in case of a foreclosure in which costs them money to do. We know they don’t want to do that because all they wanted to do was collect your monthly mortgage payment with the interest. In some cases the larger companies will have to sell their best loans to make up for their losses on the bad ones. What I mean is the 30 year mortgage note that is earning 6% and the people who have been paying on it for 8 years that have 750 credit scores, 50% equity in the house, $100k in the bank, been at their jobs for 10 years, and have never missed a payment on anything will have to be sold to another company to get quick revenue. They don’t want to sell but they know they need the money asap to cover losses elsewhere.