So now we get down to the nitty gritty on how loans really work. At the top of this ladder we have the wholesalers, and at the bottom of it is you, the consumer. In between are the lenders, the bankers, and the brokers, and they’re all pretty good at passing the buck – right into their own pocket.

The wholesalers are the people with all the money, they sell it and buy it all day long. Their main concern when offering a loan – to a lender – is their exit strategy. They want to be able to liquidate that lender’s multi-million or billion dollar account at some point if they need immediate cash. So they impose certain rules on the lender to make that account more viable.

Then the lender, after having bought all that money for loans, is once again concerned with their exit strategy. They want to pay off the debt to the wholesaler as soon as possible so they pay less interest, so they look at their options.

There are several institutions that purchase loans from lenders, two of them are Fannie Mae and Freddie Mac. Those buyers want to make sure you, the consumer, can pay off your loan, because they are going to sit on it until the loan has run its course. So the lender has to impose a rule structure on the loan to accomodate the rule structure of their buyers.

The longer someone is receiving payments for a loan, the more profit they can make, depending on the loan structure. In general, if you sell a loan right after you issue it, you’re not going to make much of a profit from the sale itself, since the buyer is looking to make a profit too. So the lender is going to impose an additional fee structure to ensure they make a profit from the loan.

Which means they charge you whatever they think they need to, in order to compensate for whatever losses they may take on the loan itself. If you’re not a "sure thing," then they can’t make a big profit on the loan, so they’re going to make a big profit on you. Come back tomorrow to see who the buck gets passed to next.