March 14, 2019
It's a common misconception that selling loans only makes sense when credit is poor. In reality, banks and credit unions will find benefits to selling certain loans even when credit quality is good.
There is a thriving secondary market for loans, but the common misconception is that it only makes sense to sell a loan where there is a credit risk. This isn't always the case. In fact, there are a number of situations in which it makes sense to sell a loan when credit quality is good.
Lenders can receive benefits from selling loans even when credit quality is good.
Selling Loans When Certain Risks Are High
Even when credit is strong, certain assets might involve higher risks, which will cut into lender bottom line results over time. By reducing these uncertainties, lenders can strengthen their overall book of business and improve margins. Some of the different types of risks that would be candidates for loan sales include:
Lenders can reduce risk and avoid foreclosure on special-use collateral and sensitive assets.
Why Sell When Credit Quality is Good?
Even in times of relatively strong credit, lenders use loan sales to avoid foreclosure on sensitive assets or special-use collateral. Our loan sales commonly include these types of collateral, which are all assets that a bank would rather avoid foreclosing on.
As a lender, it makes sense to sell these assets because they can sit in workout for extended periods (sometimes years), creating a tremendous drain on capital. Banks and credit unions can bundle and sell these nonperforming loans and reduce risk simultaneously.
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