How do you make money selling a mortgage?
There are several definitions of 'selling a mortgage', I'll do my best to provide info on each, and how money is made.
Money is typically made at the origination of a loan, when the borrower signs their final loan documents and actually obtains the loan. This is typically from fees paid by the borrower to the broker or lending institution. This would include any origination, discount points, processing or underwriting charges etc. While true services may be rendered for each of these, they are all examples of income for either the broker, or the funding bank. Once the loan is completed there are several other potential ways to make income via sales. They are as follows:
A completed loan is an asset to the bank who lent money, this is because it earns them income each month from the interest being paid. That asset can then be sold one of two ways to generate income for the lender.
1.) They can sell a loan service released. This means that they are selling that loan to another lender or bank, who will take over the entire loan. That lender will pay a premium for the loan depending the interest rate of the loan. The higher the rate, the more valuable the loan, as it will generate more income for the bank over time due to the higher interest paid by the borrower. The service released aspect of the sale means that the bank selling the loan will no longer be associated at all with the loan. These are typically bank to bank sales, and result in the borrower now making their loan payments to the new bank that purchased the loan. An example may be as follows:
A borrower has received a loan for $200,000 and that loan is now on Bank A's books. This loan was signed at 7%. Bank A seeks to sell this loan to Bank B, and trade in the monthly interest income, for a one time gain on sale, and to get their $200,000 back. Bank B is more interested in the long term income of the loan, so they want to buy the loan. The loan is generating approximately $1200 in interest per month right now. This is a return on the investment of $200,000 that the bank has made by lending the money out. Bank A may sell this $200,000 loan for, as an example, $206,000 to Bank B. This would be a sale at 103.00, meaning Bank A was able to sell this loan for 103% of the face value of the loan (200,000 X 1.03= 206,000). Bank B is willing to pay a premium, because each month they are going to generate income from this loan, as the borrower repays the money. Bank A is now completely unaffiliated with this loan, as they sold the entire loan, as well as the servicing rights to Bank B, in return for their initial $200,000 plus a profit of $6,000. Bank B hopes the borrower keeps their loan long enough to repay back the $6,000 and more.
2.) A bank may also sell a loan service retained. These are typically sales to Government Sponsored Entities (GSE's) like Fannie Mae or Freddie Mac. The basics of the sale are still the same, a bank can sell the loan for a profit if the rate is at or above average for current rates. The difference here is that they retain the servicing rights to the loan. That means that, while the bank has gotten their $200,000 back, plus a potential premium, they are still the bank of record, and they will accept the monthly payments, process them, and pass the funds along to Fannie or Freddie. For this servicing, the bank receives a small amount of the interest income (typically .125%). Because they have retained servicing of this loan, it will sell for less than a loan where servicing is being released. There are many more variables in selling a loan service retained, but this is the basics.
Lastly, loans can be sold repeatedly, with the terms of the sale changing each time depending on current market conditions etc. Each time a loan is sold, assuming the loan is being paid on time, it will typically generate some type of profit for the selling lender.