[quote=SD Realtor]That is kind of a bizarre statement. The homeowner is paying the rate specified on the note. Nothing more and nothing less regardless of how many times the note changes hands.[/quote]
It makes perfect sense if you understand the financing that the bank does.
Banks will sell off the loan if they can make more money by selling it off than holding (remember – they are really all about money, and try to make decisions based upon what is profitable for them). There are two ways this can occur.
If they need to free up capital because they are hitting the Fed’s margin ratio between liquid capital at hand and outstanding loans – remember, we are a fractional reserve system.
They can find someone to pick up the loan and cover the transaction costs in the transfer plus an additional amount over the loan value.
The transaction also has one additional contingent that they could make more money without the loan. The problem with that contingent is that any purchaser of the loan will be considering the same things.
First off, it is very hard to get a loan at exactly cost_of_capital + risk_premium. It is impossible, unless you are a congressman getting something under the table, to get it less than the cost_of_capital + risk_premium. Generally the minimum rate will look something like:
cost_of_capital + risk_premium + fed_treasury_rate + additional_profit. If the bank could sell the loan at an effective rate of cost_of_capital + risk_premium + fed_treasury_rate + lower_additional_profit, then they will and keep the weighted difference between their “additional_profit” and the other lenders “lower_additional_profit”. The price calculation looks much like how you weight the value of long term bonds with respect to treasury rate (Why the face value of the bond is not really what the price it goes for).
The rates for cost_of_capital, risk_premium and fed_treasury_rates are pretty consistent between points in time for a bank. The last part: “additional_profit” is the one that changes between banks.
To make it even more simple: It is the mere fact that one bank would purchase the note from the original bank, allowing the original bank to make a quick profit and eliminate their risk, that shows that the interest rate was not as low as possible.
