Can someone explain to me how do banks make money by selling their clients...

Discussion in 'Off topic' started by egrant886, Mar 28, 2008.

  1. egrant886 Guest

    ...mortgages to other banks? Please put it in lamens terms for me!
  2. I'm not sure but I would think they still make a small percentage by selling to other banks
  3. crisis Guest

    interest rates
    either lower or higher...the buying bank usually benefits by getting a high rates to turnover into low ones
  4. ???? Guest

    the bank uses other peoples money its not actually their money. if every1 withdrew all their money from the bank the bank would owe so many people money. because they use other peoples money as investments.
  5. samoan3d Guest

    It is less about making money and more about mitigating risk. The banks make money off the giving out the mortgage in the first place. They make money by charging higher interest rates for the money that they loan out (via mortgages, car loans, lines of credit, etc) then the money that they collect (via interest checking accounts, money market accounts, and CDs). They use the money they collect to fund the loans they pay out. By selling the mortgage, they can get the loan "off the book", which frees that money back up to be loaned out again. They also free themselves of the risk of that particular loan. The bank actually makes less money on a loan by selling it than they do if they had kept it the whole time. But it is more profitable for them to sell it. This is because they can use the same money from the original loan to fund another loan. Here is a simple example to make things a little clearer.

    Bank receives $X in savings accounts and pays out 2%.
    Bank loans $X for mortage at 6.5%.
    If they keep the loan, then they yield 4.5%

    Bank receives $X in savings accounts and pays out 2%.
    Bank loans $X for mortgage at 6.5%.
    Bank sells $X mortgage for 3.0%.
    Bank loans back out $X for another mortgage at 6.5%.
    Now, they have leveraged the money and are getting 7.5%.

    This may not look right at first, but let's break it down. They are initially down 2% because they pay that out in interest. Then, they loan out the money and get 6.5%. But instead of keeping the loan, they sell it for 3.0% (This works because the buyer gets 3.5% from the difference they are paying versus what they will get back). Now, the bank has already made 1.0% and still has the $X to loan back out. Another 6.5% loan, and the banks total yield goes up to 7.5%.

    This is a simple example and is real life it is alot more complicated. But I think it shows how the bank can leverage money. Now, imagine taking that same $X and selling that new mortgage again. Then, doing it again. The bank can keep reusing that money to loan out new mortgages and keep selling those mortgages. Unlimited potential if buyers exist for the mortgages.

    Not related to the question, but this is why we are in the mortgage crisis. The risk is outweighing the reward for the buyers, so they are stopping the buying. Banks are stuck holding these mortgages, and many of them are not good investments.

    Hope that answered your question.
  6. J O Guest

    J O
    Banks sell a large amount of mortgages and get paid on each one. The larger bank above them buys that paper in bulk then adds it to more bulk from other banks and sells it up the ladder as they collect more and more mortgages. The big banks make $$$ on the interest over time because they have the overhead to wait and collect interest
    J O,
  7. hooyutoo2 Guest

    Yeah !~ I wanna know also !
  8. Who Guest

    They basically get money up front instead of having to wait for the monthly payments and no longer have to worry about deadbeats.

    The bank can then reinvest the large chunk of money it just got into something they feel will be more profitable.
  9. a couple of reasons

    1) to reduce their risk on the mortgages. remember if someone defaults on a mortgage the banks take a hit
    2) they can make money short term. a mortgage is a steady stream of money over a long term. if the banks need some quick cash they can sell these mortgages on the open market

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