Why Do Mortgage Lenders Sell Your Loan?

If you’ve ever taken out a mortgage there’s a good chance your lender sold your loan soon after closing. In fact it’s common for mortgages to be sold multiple times over their lifespan. This leaves many homeowners wondering – why do lenders sell mortgages in the first place?

There are a few key reasons mortgage companies opt to sell off loans:

To Free Up Capital for New Loans

One of the main reasons lenders sell mortgages is to free up their available capital so they can issue new loans

When a bank funds a mortgage, that money is essentially locked up for 15-30 years until the loan is paid off. By selling the mortgage to investors, the lender receives a lump sum payment upfront. This gives them immediate capital to make more loans.

If lenders had to hold onto every mortgage until maturity, their lending abilities would be severely limited by their capital reserves. Secondary market mortgage sales allow for continuous cycles of lending.

To Generate Immediate Revenue

In addition to freeing up lending capital, selling mortgages also generates immediate income for the lender.

While a lender earns money from interest payments over the life of a loan receiving the full value upfront is faster and provides instant revenue. Lenders can make a larger short-term profit by selling mortgages compared to collecting payments over decades.

To Reduce Portfolio Risk

When a lender holds mortgages in their own portfolio, they take on the risk those loans may default. By selling mortgages to investors, lenders transfer that risk.

If large numbers of borrowers default, the investors who purchased the mortgages take losses, not the originating lender. This diversification reduces risk exposure for lenders.

Who Buys Mortgages from Lenders?

Mortgages are predominantly sold to two sources – government-sponsored enterprises and government agencies.

Government-Sponsored Enterprises

The two largest purchasers are Fannie Mae and Freddie Mac. These government-sponsored enterprises buy conventional mortgages from lenders and bundle them into mortgage-backed securities that are sold to investors.

Fannie Mae and Freddie Mac do not directly offer mortgages to consumers but rather work with lenders by buying and securitizing loans. This provides constant liquidity in the mortgage market.

They generate revenue by selling off the mortgage-backed securities and guaranteeing investors receive scheduled principal and interest payments.

Government Agencies

Certain government agencies also purchase mortgages that meet their program criteria. For instance:

• FHA loans can be sold to The Federal Housing Administration
• USDA loans to the U.S. Department of Agriculture
• VA loans to the U.S. Department of Veterans Affairs

These agencies buy qualified mortgages from lenders and resell them to private investors or hold the loans themselves. This allows them to finance more loans that fit their specific programs.

How Loan Transfers Work

When your mortgage is sold, your original lender collects payment up until the loan transfer date. After that, you begin making payments to the new investor.

Federal law requires written notification within 15 days of any transfer so you know where to send payments. Your existing loan terms do not change when a mortgage is sold.

Two key things to watch for when your mortgage is transferred:

Loan servicing changes – The company servicing your loan (collecting payments) may switch. Make sure payments don’t fall through the cracks during any transition.

New investor policies – Each mortgage owner has their own payment processing standards. Understand any new requirements to avoid issues.

As long as you get the transfer notices and act promptly on any servicing changes, the sale itself is largely invisible from the borrower perspective.

Impacts on the Borrower

Mortgage transfers do not impact the actual loan details or rates locked in at closing. However, there are some potential effects:

• Servicing changes – As noted, if loan servicing moves to a new company, you must update payment and account details accordingly.

• Prepayment policies – If you want to refinance or pay off the loan early, the new investor may have different prepayment requirements.

• Late payment processing – Each servicer handles late fees, grace periods, and reporting to credit bureaus differently. Policies vary.

• Refinancing approvals – An existing loan owned by an investor makes getting approved more challenging versus working with your original lender.

• Assistance options – Eligibility for hardship programs or modifications may change under new investors.

While inconvenient, these impacts are manageable as long as you stay organized and connected with your current servicer. Document any loan sales for future reference.

Can a Mortgage Be Sold Multiple Times?

It’s common for a single mortgage to be sold more than once over its lifespan. Ownership can change hands several times depending on business needs of investors.

For instance, Fannie Mae and Freddie Mac regularly package mortgages into new securities pools to sell to other private investors as older securities mature.

Likewise, larger banks may sell packages of loans to smaller community banks as investment portfolio adjustments to manage risk and loan concentrations.

The more times a loan is sold, the higher the odds servicing will be transferred to new companies. While a hassle, as long as you diligently manage payments and account details, multiple sales do not directly impact the borrower.

Are Some Mortgages More Likely to Be Sold Than Others?

Certain types of mortgages tend to be sold more frequently than others:

• Conforming loans – Loans that meet Fannie Mae and Freddie Mac buying guidelines are commonly sold as they can be easily securitized.

• FHA, USDA, and VA loans – Government-backed loans are often sold to their respective agencies then bundled for investors.

• Jumbo loans – Non-conforming jumbo mortgages are typically sold to larger investors and not held by local banks.

• Non-prime loans – Subprime or alt-A mortgages get sold to generate immediate revenue due to higher risk.

• Low-rate loans – Deeply discounted mortgage rates result in loans being sold quickly to maximize profits.

Meanwhile, certain loans are more often held in lender portfolios:

• Portfolio products – Loans with unique terms, like ARM adjustments, may be retained instead of sold.

• Modified loans – Refinanced/modified mortgages usually cannot be securitized so banks hold them.

• High-balance loans – Jumbo loans above agency limits are often too large for securitization.

• Low-volume lenders – Small banks with limited origination volume tend to keep loans rather than sell.

Can You Pre-Pay or Refinance a Sold Mortgage?

If your loan gets sold, you can still refinance or pay it off early – but the process may be more difficult. Here are some cases:

• You’ll likely have to work with a new lender if servicing transferred to a different company.

• The new investor may impose penalties or certain requirements if you want to refi or pre-pay.

• Refinancing rates and terms will be driven by market conditions at the time, not your original loan.

• You typically cannot simply “swap” a sold mortgage with your original lender – it must be formally refinanced.

While extra steps are involved, you ultimately maintain the ability to refinance or pay off a sold home loan if needed. Shop multiple lenders to find the best deals.

Can You Prevent a Mortgage from Being Sold?

Borrowers typically cannot outright prevent their loan from being sold, but you have some options:

• Ask lenders if they plan to keep or sell your loan – consider ones more likely to portfolio.

• Choose smaller, local community banks that originate and hold loans in-house.

• Opt for larger jumbo loans that may not appeal to secondary buyers.

• Select adjustable-rate or specialty loans not easily securitized.

• Take a slightly higher rate in exchange for lender guarantees to hold the mortgage.

However, there are never any guarantees. Even if your bank says they will retain your loan, future circumstances could always force them to sell.

The easiest way to handle mortgage transfers is simply to be prepared if it happens and act quickly to provide new servicers the details they need.

The Benefits of Mortgage Transfers

While not ideal for borrowers, the widespread practice of mortgage transfers and sales does provide systemic benefits:

• It keeps capital flowing so lenders can issue more home loans.

• Banks reduce risk exposure by offloading loans to investors.

• Government agencies use sales to finance special affordable housing programs.

• Fannie Mae and Freddie Mac provide stability and liquidity in housing.

• A robust secondary market attracts large global capital investments into U.S. real estate.

So while sometimes inconvenient, mortgage sales ultimately help provide competitive mortgage rates and constant access to credit for borrowers. The market as a whole is healthier due to this practice.

The Takeaway

Mortgage loans are regularly bought and sold among banks and institutional investors. This is actually vital to keeping real estate lending flowing efficiently.

While mortgage transfers can impact servicing or prepayment options, they do not change your existing loan terms, rates and contractual obligations.

As long as you stay organized in handling any servicing transfers, the sale of your home loan is mostly just paperwork shuffling behind the scenes. The liquid secondary market is beneficial overall for providing readily available mortgage money.

The most important thing is making sure you always know where to send your monthly payments and keeping your account in good standing throughout any investment sales and transitions.