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The banker from the credit union that mortgaged my house has just reached out with a refinance special, that would reduce my mortgage rate.

I understand that I will need to pay for refinancing and they will make money out of this. However, I would only do this if this is beneficial to me, i.e. the cost of refinancing is lower than savings from reduced rate. In other words the credit union would lose some money in this scenario (they would get more in the long term from the interest).

Why are they doing this and how do they plan to make money off me? Is it the case that my mortgage was already sold out to someone else and my credit union is not involved in the payments anymore, so they are just trying to set a new deal with me. Why whoever purchase the mortgage didn't have a legal protection against this (i.e. prevent the same bank from undercutting them thi way)?

  • A quick answer is that they aren't going to be making money in this transaction with you, but by helping you save money now you may be more likely to get your next home loan through them. Or since they gave you such good service you will convince friends/family that they are a good credit union to get a mortgage through. – rhavelka Jan 2 at 21:28
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    Probably they figure that given lower interest rates and so on, there's a good chance that you would be refinancing anyway, so by being pro-active, they get you to refinance with them rather than shopping around. – jamesqf Jan 3 at 5:20
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    "Is it the case that my mortgage was already sold …" is a bit confusing. If this is nothing more than your personal conjecture, the question might be better without the rest of that paragraph. – Ray Butterworth Jan 3 at 14:48
  • You would be notified if your mortgage was sold. – TTT Jan 3 at 15:48
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In other words the credit union would lose some money in this scenario (they would get more in the long term from the interest).

You may pay less interest in the long run, but the bank is not necessarily "losing". The reason that you are getting a lower interest rate is because the interest rates that the bank is paying to borrow money (i.e. from the US Government) is lower than it was before. So the CU is trying to preemptively lock you into a new mortgage before some other bank entices you to refinance with them. So they are still making money by getting more interest from you than they are paying out (and by collecting another set of origination fees) - offering you a rate reduction is just a way to keep your business from going elsewhere.

Why whoever purchase the mortgage didn't have a legal protection against this (i.e. prevent the same bank from undercutting them this way)?

Because there's no law against someone prepaying their mortgage. It is a risk that lenders inherently accept when they buy or originate loans and is baked into the interest rates they charge or the amount that they pay for loans. Occasionally a lender will add a prepayment penalty to a loan to help mitigate this risk, but it should correspond to either a lower interest rate or a higher price for the loan (since prepayment risk is lower). They are also more common on higher risk loans (e.g. due to poor credit) so that their interest is locked in since if/when the borrower improves their credit they could shop around for a better rate. Adding a prepayment clause reduces the prepayment risk for the lender.

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The basic answer is that mortgages are designed and priced as callable bonds. The lender or buyer of the mortgage knows, going in, that if rates fall significantly, they will not receive the corresponding "windfall" unless you (the borrower) drop the ball and neglect to refinance. Their economic loss has already occurred because they treat you as a rational counterparty (you can take it as a sign of respect) who will refinance with someone. They know it's a "dead mortgage walking" and are just trying to retain your business going forward.

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You just said that they previously sold it. So they've made as much off it as they can, unless you move to them (again). Then they can get their fees (again) and possibly sell it to another company again.

Right now, it's your current company that will "lose" because they were expecting to get a majority or all of the remaining interest and now the credit union will instead.

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    ` Is it the case that my mortgage was already sold out to someone else` sounds to me like they are speculating, and not saying that it actually was sold to somebody else... – Michael Jan 2 at 23:02

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