Portfolio Lender

A “portfolio lender” is a financial institution that originates loans but doesn’t sell them on the secondary market. They keep the loans for themselves and use their own money to fund them. This means they take on more risk than FIs who, say, sell their loans to Freddie Mac, but it also means they can sometimes offer loans in circumstances another financial institution might not.

Let’s say we’re buying a house, and, like most people, we need a loan to do it. So we head on down to the local branch of Large American Bank and we get ourselves a mortgage. Large American Bank then turns around and sells our loan to someone like Freddie Mac. This probably isn’t going to have much of an impact on us the homeowner, but it does mitigate Large American Bank’s risk. If we default on the loan, it’s Freddie Mac that takes the hit, not Large American Bank. This is why FIs like Freddie Mac are super particular about the loans they buy, and it’s why FIs like Large American Bank are super particular about the loans they originate.

Now let’s enter Tiny Town Bank into the equation. Tiny Town Bank, or TTB, is a portfolio lender and an integral part of our tiny town community. When we go to TTB for a mortgage, they fund it with their own cash, and they don’t sell it to Freddie Mac or anyone else. Sure, they’ll get burned if we default, but they also know us well enough to know we probably won’t. After all, we’ve been banking there since we were 16, and the bank manager plays squash with our Uncle George.

Like we said…community. Chances are, TTB won’t have all the myriad types of mortgage loans available somewhere like Large American Bank. But they might be more willing to give us the loan we want, since they don’t have to meet the stringent loan resale requirements of a big FI (like Freddie Mac).