What Is a Portfolio Sale?
A portfolio sale is the sale of a large group of related financial assets in a single transaction. A portfolio sale, sometimes called a "bulk sale," is common in the secondary mortgage market. Freddie Mac and Fannie Mae are two of the most prominent players in this market; they purchase portfolios of loans, which originate as residential mortgages, from banks and credit unions. This, in turn, helps these financial institutions improve their liquidity by turning loans into cash, which can then be used to make additional loans.
- Portfolio sales involve selling a bulk amount of similar assets all together in a single transaction.
- When a company goes out of business, it may sell off its assets or client list all in one portfolio sale to a single buyer.
- In the mortgage market, issuers like Fannie Mae will sell a bundle of mortgages to buyers on the secondary market in a portfolio sale, who may then securitize them into mortgage-backed securities.
Understanding Portfolio Sales
Freddie Mac and Fannie Mae not only facilitate portfolio sales by purchasing loans, they also help lenders pool these assets in ways that are the most profitable for the lender. Before they agree to a portfolio sale, however, Freddie Mac and Fannie Mae perform due diligence on the pooled loans to make sure that they meet their credit requirements and are appropriately documented. This requirement is part of the reason that lenders ask borrowers for detailed information when they apply for mortgages: because to sell the loans later, they have to provide that same information to the buyer. (To learn more, see: Fannie Mae and Freddie Mac, Boon Or Boom?)
Portfolio Sales and Mortgage Servicing Companies
Mortgage servicing companies also engage in portfolio sales. A servicer might sell a group of thousands of loans that it collects payments on, worth millions or even billions of dollars. The loans typically have shared characteristics. The borrowers might all live in the same state and have similar credit scores, and the loans might all be fixed-rate loans of a similar principal amount, interest rate and loan-to-value ratio. After the servicer announces a portfolio sale, interested buyers have a set amount of time, perhaps two weeks, to bid on the portfolio, and the sale goes to the highest bidder.
Portfolio Sales and Receivership
Portfolio sales can also occur when a financial institution enters receivership. For example, in 2009, when the Federal Deposit Insurance Corporation (FDIC) acted as receiver for the failed IndyMac Federal Bank, its purchaser, OneWest Bank, had the right to execute a portfolio sale in which it could liquidate the remaining shared-loss loans. Third parties could submit sealed bids for the portfolio sale. Under the terms of the shared-loss agreement, the FDIC could require OneWest to liquidate any shared-loss loans not sold through a portfolio sale.
(For further reading, see: Too Good To Be True: The Fall Of IndyMac.)