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A portfolio lender is a lender that don’t just originates loans, but also holds them as well instead of selling them on the secondary markets.
The majority of lenders who originates home loans resell them as soon as possible after closing on the secondary market in the form of collateralize debt obligations (CDO) and mortgage backed securities (MBS).
This essentially means that even though a borrower took up a loan from particular lender, that lender is usually not the creditor on the mortgage due to them selling the loans to institutional investors.
And some borrowers don’t even realize that they are making payments towards parties other than the lender they borrowed from.
This is partly made possible with third party account servicing agents who promptly service the borrowers’ accounts.
Lenders who intend to become portfolio lenders often are unable to undertake such operations as they simply don’t have enough capital to maintain these types operations.
This means that portfolio lenders need sufficient capital to become one, or need to have access to the capital markets where they are able to easily borrow from other lenders at wholesale rates.
However, because portfolio lender are taking considerably more risks than those who resell in the secondary markets, they don’t often offer the best mortgage rates and terms to consumers.
This is especially so for fixed rate mortgages.
And to manage the inherent risks of volatile interest rate movements, most of the loan they underwrite and originate are adjustable rate mortgages that are pegged to index rates.