Private buyers are investors who purchase residential or commercial mortgages and are not affiliated with government agencies. They take on the risk of borrower default and typically purchase loans with above-average interest rates. Private buyers may purchase loans directly or through investment firms that package loans into mutual funds. Private mortgages are not sold on stock markets and are repaid by filing a notice of transfer of ownership with a regional court. Borrowers and investors are bound by loan agreements, and there are strict laws governing loan buying and selling.
A private buyer is an investor who is not affiliated with a government agency or publicly sponsored entity. The term “private buyer” is most commonly used to describe individuals or finance companies that purchase residential or commercial mortgages. Investors use the term to differentiate these investors from government-sponsored firms that buy large numbers of consumer loans.
To encourage lenders to finance residential and consumer loans, national or regional government agencies often agree to insure or purchase loans from banks and other finance companies. Typically, government-sponsored businesses only purchase or insure loans that meet certain criteria in terms of loan amount and borrower creditworthiness. Loans that do not meet government guidelines are often sold to private buyers as there are normally few restrictions on the types of loans financial institutions can sell to these investors.
Like a government-backed agency, a private buyer must settle for the risk that the borrower may default on the debt. If this occurs, the buyer may be entitled to take legal action against the borrower, but in many cases private owners of defaulted loans end up with nothing. Given the risks involved, private buyers typically only purchase loans on which borrowers pay above-average interest rates. The borrower’s loan payments produce a recurring monthly income for the private buyer.
While some private buyers purchase loans directly from banks and other lenders, in many cases a private buyer has no direct contact with the original lender. Investment firms often purchase thousands of loans from banks and then package these loans into mutual funds. These companies sell mutual fund shares to private buyers. Therefore, each buyer has an ownership stake in a large number of loans rather than the total ownership of a particular loan.
In addition to loans involving major commercial lenders, many mortgages involve loan agreements that have been negotiated between individuals. People who have bad credit scores often look to friends, relatives or business acquaintances for loans. In some cases, these loan agreements include clauses that allow the lender to sell the debt to another party. Unlike loans issued by commercial banks, these privately issued mortgages are not sold on the stock markets. A private buyer, on the other hand, buys the mortgage by repaying the creditor the balance due and filing a notice of transfer of ownership with the regional court.
Regardless of whether a loan is purchased by a public or private entity, the borrower and investor are bound by the terms of the loan agreement. This means that a private buyer cannot request full repayment of the loan before the loan maturity date, unless the loan agreement contains a clause that allows the lender to request the loan. In most cases, there are strict laws governing how loans are bought and sold, and borrowers are normally notified when debt changes hands.
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