What Is A Sale Of Loan Portfolio?
A loan portfolio sale occurs when a lender sells off a significant portion of its loans, usually at once. Loan portfolio sales are peculiar to the mortgage industry.
Loan portfolio sales are a way for banks and other mortgage-servicing companies to replenish their funds to grant additional loans. When customers request a mortgage loan from a bank, the bank finances it using its available funds. As loans from various customers accumulate over time, the bank would run out of funds to grant new loans. So to raise money, the bank would sell off its loan portfolio.
A loan portfolio sale features bidders from different backgrounds, and the sale takes place at a unique marketplace known as the secondary mortgage market. Typically, there are bidders, including but not limited to banks, conglomerates, and distressed debt entities. Each of these bidders is motivated by different factors to acquire a loan portfolio. For instance, a bidder may want to purchase a loan portfolio at a discount, break it up and resell it in smaller parts.
Before a loan portfolio sale goes through, the buyer would perform due diligence on each loan to ensure that they meet their credit requirements and verify all necessary documentation. That is why mortgage-servicing companies require customers to provide detailed information when applying for mortgages. The information provided by the customers is what the company uses when they want to sell the loan.
Sale Of Loan Portfolio Example
The demand for mortgage loans from a local mortgage company has been on the rise. After granting several requests, the company still has several pending requests but does not have enough money to finance them. The local company heads to the secondary mortgage market and sells its loan portfolio to a more prominent financial institution. With the funds received from the sale, the local company can now continue granting additional loans.« Back to Glossary Index