I will try to illustrate for those who really care. But this gets a little bit too deep into secondary market activity.
Last edited by CompDat; 10/21/09 06:41 PM.
When you sell a loan to an investor you get income from three sources. The three sources are the junk fees you charge, the buy price and the SRP. The junk fees you charge are really self explanitory. The buy price, is the price the investor is willing to pay for your loan.
For example, say your applicant is applying for a loan of $250,000 but wants 4.5%. When you check with your investors they only offer 4.75% for 250k loans for borrowers with similar credit. The buy price on the 4.75% is 1.2% but at 4.5% the investor will not give you a buy price, thus they will buy it for par. So to make up for the loss in buy price you charge 25 points or .25% of the loan amount for the borrower to buy down the price. It is in the borrowers best interst to buy down the loan (in the long run) so you charge them $625 (250k*.0025). Now you get $650 in other income for your bank, in addition to the SRP and buy price.
The SRP is the price for servicing the loan. It is typically paid a price that correlates directly to loan amount, program and duration of the loan. All in all, the lender makes a lot of money on these loans. SRP and Buy price normally add up to ~2% of a loan amount and the junk fees are probably around $1,000. Thus, a lender on a loan similar to the loan in our example would make about $6,000. That is why commissions are so high and there has been some much criticism of the lenders.
Edited to add: I have this lender getting back a lot of money and it is an unrealistic example, however they do make a lot of money. As you can see, as SRP goes up, buy price goes down. This is because most lenders only want to make a set amount on each loan. So the more you make in SRP (loan amount) the better the interest rate you can look forward to. Which is why those who can afford less home have higher rates.