They sold my loan? (actually a good thing)

So you checked with dozens of lenders and got a great rate with low fees for your home mortgage.  You selected a reputable bank to help you purchase your dream home.  And, within a year of closing, “your” bank sold your home loan to another lender.  Why would they do this?

This phenomenon is called the “secondary mortgage market”.  It used to be that banks only served their local communities.  Customers deposited funds into their savings accounts, checking accounts, or invested into longer term certificates of deposit (CD).  Banks then could turn around and use these funds to issue loans to other customers to purchase cars or homes.

One problem is that if too many customers take out loans, banks can literally run out of money.  They may have many more customers that want to take out loans.  But, the bank can have a shortage of funds to work with.  It turns out, there are always investors looking for a good return on their money.  With the electronic, interconnected world we live in, an “I scratch your back you scratch my back” situation emerges.  Banks can bundle their mortgages into a security and sell them to investors.  The investors then have a stream of monthly payments coming in with a known return.  And, banks get a bunch of their money back so they can turn around and issue more loans to other customers.

Obviously, this helps the bank.  How does this help the consumer?  If a bank holds a home loan for 30 years, there is always a chance the family will default on the loan.  If the bank can sell off the loan within a year or two of originating the loan, their risk is greatly diminished.  They can offer consumers a much more attractive interest rate since their risk is much lower.

Anyway, it can feel like your bank is abandoning you when they sell your loan to another bank.  But, the positive is that they can offer you a much more attractive interest rate since it greatly reduces their exposure to default risk.  Now you know the rest of the story.