What is a Portfolio Lender?

A portfolio lender is a mortgage lender which both originates and holds mortgage loans. Such lenders often have more flexible lending guidelines which sometimes make it easier for people to obtain loans through them than it would be to use a different kind of lender. It is important to note that although portfolio lenders do hold loans, they may at some point sell them, instead of servicing them for the life of the loan.

With a portfolio lender, when someone takes out a loan, the lender keeps the loan as an asset. It makes money on the origination fees associated with the process of generating the loan in the first place, and then it collects interest on the loan when it enters repayment. Portfolio lenders may handle their own loan servicing, or may contract with another company to service their loans, depending on how they are set up.

It is not uncommon for small community-based financial institutions to act as portfolio lenders, although bigger institutions can as well. Once a portfolio lender has held a loan for at least a year and the repayments have gone smoothly, it is considered “seasoned.” At this point, the lender may choose to retain the loan, or to sell it on the secondary mortgage market. The money received from the sale can be used to originate another loan, thus allowing the lender to continue lending out money. The sale also reduces risk to the lender, because the buyer of the loan now assumes the risks associated with the debt.

People who have difficulty obtaining conventional loans can consider a portfolio lender. Such lenders don't have to abide by standardized guidelines and can set their own standards because they are intending to keep their loans. In addition, smaller financial institutions may be more willing to make exceptions for people with adverse credit events, whereas a big bank may not be able to offer this flexibility. Banking locally also keeps money in the community, which may be viewed as a benefit by some borrowers.

In the wake of the 2008 financial crisis, many portfolio lenders tightened up their standards considerably. In the United States, the failure of Washington Mutual, a bank which operated as a portfolio lender, was a sobering reminder of the danger of having borrower standards which are set too low. The bank made a number of risky loans and paid the ultimate price when its borrowers began defaulting.