UnThreaded | Threaded | Whole Thread (4) | Ignore Thread Prev | Next
Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 126963  
Subject: Re: refinancing mortgage Date: 4/3/2001 2:09 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Hi ambrad,

<<we are wanting to refinance our first mortgage and the bank we are looking at will most likely turn around and sell our loan. Are there any drawbacks to refinancing with a bank that does this? Why do they do that?>>

Let's start with;
"Why do they do that?"

Well, imagine you were a bank with $1 million to lend. Let's say you had 10 customers come in to borrow $100,000 each for home loans, and you made those loans. On each loan you made a couple hundred bucks in underwriting fees, so that $2,000 or revenue to the bank (10 loans X $200.) Now, you also own 10 mortgage notes that have a value according to their interest earning capability for the next 30 years. There you sit... with your $2,000 fee revenues, and your promise of interest for the next 30 years... and you have your overhead, your payroll, and your company's shareholders and board to make happy (and there are several impatient Motley Fools in this crowd!)

What's a bank director to do?

Along comes a bigger wholesale investment bank with billions of dollars to put to work (and even more Fools watching over their shoulders demanding P/E growth!) The bank director comes to you and says, "I'd like to give you $101,000 TODAY for each of those mortgage notes you have. You get to keep the extra $1,000, and my bank gets to collect the interest for the next 30 years."

Well, you think about it long and hard (actually, your a professional banker, so you immediately say "Heck YES!") You have your capital back at the bank, and although you don't get the approximately $200,000 of additional interest on each $100,000 loan you would have been able to collect over 30 years, you now have the ability to make more loans which will generate more cash flow to pay the secretaries and keep the lights on... AND you'll get the discount difference again when you re-sell the next batch of mortgage notes to those big wholesale banks.. and THAT makes you shareholders and board happy, which means you keep your job, which means your wife and dog won't leave you... which means some country music songwriter won't be able to write about YOUR life.

*******************************************
Now...
"Are there any drawbacks to refinancing with a bank that does this?" (I assume you mean drawbacks to you, the borrower?)

Well, yes... kinda. But they're not that big of a deal in comparison to the advantages you wouldn't otherwise get (which I'll explain below.)

The drawbacks are that;
1) If, down the road, you want to refinance again, you won't be able to go to the original lender and ask them to waive prepayment penalty fees (if they apply.) (And if they "could" there's still no certainty that they WOULD!)
2) You won't have a personal, physical individual at your neighborhood bank who is individually responsible for your specific loan (though I don't know that this has existed in decades anywhere anymore in any banks.)

The Trade-Off Advantages;
1) You'll be able to get much lower rates and fees, because your lender won't have to stick all of his costs-of-business onto a very few borrower's backs,
2) You'll have much more choices of loan programs, as the wholesale lenders are plentiful and competitive... but the neighborhood bank is one or maybe just a few.

If you like the advantages over the disadvantages, and would be interested in discovering more about the wholesale lenders that may be available to you... post us back here at these boards, OR click 'reply to author' if you want to keep it private.

In short, these days there's really no advantage to having a bank that DOESN'T sell-off their mortgage loan notes.

Think about it for a moment... why would you want that?

All the best,
Dave Donhoff
Home Finance USA
Lic. Mortgage Broker
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (4) | Ignore Thread Prev | Next

Announcements

Useful Resources
Our Home Center has all you need to make buying and owning a home a great experience. Get or refinance a mortgage and much more!
Buying/Selling a Home FAQ

Mortgage Professor
Offsite resource for mortgage questions.
2013 Feste Award Voting Begins!
Who will win the 2013 Feste Award? Vote now for the Fool that most exemplifies the Fool Community mission of Learning Together!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Tax Strategies

TMFPMarti-Feeling Good
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement