No. of 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.

"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
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