Why Do Most Lenders Sell their Mortgages?
Indiana Housing & Community Development Authority is proud to have made the process of buying a home a reality for thousands of Hoosier families. We offer programs that assist Hoosiers with making down payments, getting low interest rate loans and even special programs for families that live in rural areas. In every county across Indiana there are lenders on hand to help with all the plans we offer. Explore our resources to learn about our programs, income and household limits as well as what lenders will be able to help you realize the dream of owning a home in Indiana. Go to their website to find out more about the programs offered.
State of Indiana Forclosure Help website
Hoosiers in danger of losing their home to foreclosure can now “get hope” thanks to the Indiana Foreclosure Prevention Network (IFPN), a public-private partnership headed by Indiana Lieutenant Government Becky Skillman that is working to reduce the number of home foreclosures in the state.
IFPN has established a toll-free, confidential help-line for Hoosiers facing foreclosure:
1-877-GET-HOPE. The help-line will be answered daily from 8:00 a.m. to 8:00 p.m. Callers will receive budgeting help, a written financial plan and/or assistance in contacting lenders, all of which will be given FREE of charge. If callers need more than what can be provided over the phone, they will be referred to a state-certified foreclosure prevention specialist in their area, also FREE of charge.
For more details on the “Get Hope” campaign, visit IFPN’s website at : www.877GetHope.org or download the following brochure.
If you are worried that foreclosure could be in your future, do not delay.
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Prospective homebuyers should do their homework before purchasing a mortgage. REALTORS® offer the following informative brochures that will also help current homeowners keep their investment:
Traditional Mortgages: Understanding Your Options
Specialty (Nontraditional) Mortgages: What are the Risks and Advantages?
Learn About FHA Mortgages
How to Avoid Foreclosures and Keep Your Home
How to Avoid Predatory Lending
Indiana Association of REALTORS® Government Affairs Director Sally Johnson recently testified before the Indiana General Assembly’s Interim Study Committee on Mortgage Lending Practices and Home Loan Foreclosures. Go to the Indiana Association of REALTORS® to read her testimony discussing why the foreclosure issue is “personal” for REALTORS®. The Committee is expected to soon release its final recommendations for consideration during this coming session of the Indiana General Assembly. Click here to stay up-to-date.
Question from a BUYER: "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 an-other 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 institution. The larg-est 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 prior to their sale. The unsold mortgages serve as collat-eral for these loans. As the mortgages are sold, the loans are repaid.
Mortgage bankers need very little capi-tal because they have excellent collat-eral 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, how-ever, servicing has become quite con-centrated among larger firms, and most mortgage banks today no longer ser-vice 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 pro-vide a wide variety of financial instru-ments to consumers and businesses, including deposits or deposit-type in-struments, 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 capac-ity to hold mortgages permanently in their portfolios, if they want to, and some do. They have more capital than mortgage banks, and deposits typically provide a more-or-less stable funding source. But depositories can also sell mortgages in the secondary market, the same way that mortgage banks do, if the mortgages they write don't fit into their portfolio strategies.
Many depositories have a general pol-icy of holding any adjustable-rate mortgages (ARMs) that they write, but selling fixed-rate mortgages (FRMs) in the secondary market. This policy evolved after the interest-rate explo-sion of the early 1980s, which bank-rupted many savings and loans holding FRMs. In a rising-rate environment, a depository's cost of funds will rise much more rapidly than the income it earns on a portfolio of FRMs.
Some borrowers such as the one whose letter I reproduced above are nostalgic for the old system, which existed be-fore there were mortgage banks, when your mortgage lender was your mort-gage lender until the loan was paid off. Loans were not sold and all lenders serviced the loans they made.
Is it possible for a borrower today to find a lender who will operate that way? Such a commitment could not be made by a mortgage bank -- it would have to come from a depository that serviced its own mortgages, and that was prepared to give up the right to sell them.
I seriously doubt that any depository would commit never to sell its FRMs, but it is possible that they would do it for ARMs, The marketing possibilities are certainly intriguing; here are some un-copyrighted tag lines: "We are your lender for life, guaranteed." "We don't abuse customers we plan to keep." "We believe in long-term relationships, not casual encounters."
Borrowers were never consulted about the changes in industry practice that resulted in their being thrust into long-term business relationships with firms they did not select. There were side benefits to these changes, of course, including much greater competition for loans and easier lending terms. Still, it would be good if borrowers could choose a lender for life, even at a slightly higher price, and even if they have to take an ARM. Right now, they have no such choice.
Writer Jack Guttentag is professor of finance emeri-tus at the Wharton School of the University of Penn-sylvania. Comments and questions can be left at www.mtgprofessor.com.
Source: Inman News