Let us not forget that retail lending has incredible marketing going 24/7 to rewrite loans. Again the word Broker is being substituted for loan officer.

Second, if a retail institution allowed its loan officers to offer such No Cost loans to the consumer and loan #1 “ran off” (got paid off) so quickly, that retail instituion could well lose as much money as if they’d bought loan #1 from a broker. It all depends upon what commissions they allow their LO’s to make in such situations, how much of the imputed future servicing value of loan #1 was allocated into the branch’s profits (and used to pay rent, phones, processor salaries, 401k plans, manager’s bonus etc etc.). Some retail intitutions (Wells) pay only reduced commission for refi’s of loan already in the servicing portfolio. Others (Countrywide) don’t reduce commission for re-refi’s. You might be surprised how similarly Countrywide’s retail side would look at these transactions compared to your view as a broker. Each Countrywide branch works like a little brokerage. Loan #1 would have looked like a 280 bp gross (less closing costs) to them- same as it did to you.

So this really isn’t an issue of broker vs correspondent vs retail, which brings me to my third & final point:

The problem from a servicer’s point of view is not wholesale – it’s doing No Cost loans at all. No Cost loans work great for originators (since they increase the odds of another refinance in the near future) & great for the consumer who is only in the loan for 2-3 years or less. They are terrible for servicers who are stupidly banking on a seven year life of the average loan in their portfolio. The answer is to cap the all-in price at some level where the borrower has to have some “skin in the game” (pay some/all of their closing costs). If that means they get overlooked by originators doing No Cost loans, so be it. Banks can’t be all things to all people, and buying loans at 102.500 – 103.00 or higher in the hopes that rates will stay stable or rise (making the loans safe from runoff risk) is STUPID. We LO’s who like No Cost loans (I do) can rest assured, though, that there are plenty of stupid secondary marketing geeks, so there’ll probably always be some investor willing to play Russian roulette with WAY above par pricing.

The better question is whether this loan has been sold off to the GSEs before it was paid off. If so, this would mitigate the lenders loss.

1- Their original costs $7,560 plus I am sure some underwriting and adminstrative costs.

2- The bank’s cost of funds differential (borrow vs. lend rate), and

3- The value of the loan to the open market. I don’t know when you did this loan but 6.375% on a 15 year seems high. Anyway, if the open market is paying 200 basis points+/- more for that loan then the bank makes money (again, I don’t know when you did this). If not, then they lose. It is basic interest rate risk management. A properly managed bank will have hedged against a fall in rates or quickly sold of the loan. Basic banking.