 | Mark Kolarik is the President of the Kansas Teachers Community Credit Union, located in Pittsburg, KS, since 10-2002 and is a board member of the Kansas Corporate Credit Union located in Wichita, KS . He has been employed in the financial service industry for the last 31 years, having worked in several credit unions for 21years and 10 years in the banking industry. He holds a Bachelor of Business Administration degree from the University of Wisconsin-LaCrosse and is a Certificated Credit Union Executive. |
Banking & Finance
2012-11-07 11:33:34
How do banks resell home loans?
Q- Can you tell me how banks resell home loans and why they do it?
A- The home loan market is huge and one single bank or credit union is unable to fund all the mortgage loan requests. Federal regulations and the asset size of the financial institution limit the amount of home loans that can be held by any one institution. These regulations are designed to help keep financial institutions healthy, protecting them from large and rapid changes in interest rates. The following scenario would show how changing interest rates could affect the financial strength of an institution.
Scenario:
A bank lends all of its available deposits in 30 year home loans, at an interest rate of 2%. The bank pays the depositors .25% on money deposited in the bank. In this scenario, the bank has a margin of 1.75% to create income to operate the bank. If the economy changes and deposit interest rates increase to 2%, the bank now needs to pay depositors 2% to maintain deposit balance levels. Since the bank has locked in all their available funds for 30 years earning only 2%, in a rising rate scenario they will be unable to generate income to operate the bank. In this situation, eventually the bank will fail.
To avoid the above scenario, banks/credit unions will originate and fund home loans, then resell the loans to have money available to fund more home loans. Most home loans are sold to Fannie Mae. This agency was formed by Congress to keep money flowing to home loan lenders. A financial institution selling home loans must follow the underwriting standards established by Fannie Mae or Fannie Mae will not purchase the loan. Fannie Mae then groups these home loans into large securities and provides investors an opportunity to invest in the security. When investors purchase the securities, Fannie Mae is then able to purchase more home loans from lenders.
Once the loan has been funded and sold to Fannie Mae, the servicing (payment collection/statements) may be retained by your financial institution, or transferred to another servicer. However, the actual home loan is no longer owned by the originating financial institution. The financial institution earns income from loan origination and servicing fees. By selling home loans, the financial institutions can keep making home loans and avoid the interest rate risk of holding long term home loans.
