Most banks initiate loans and then sell them off and merely remain as servicing agents. A portfolio lender holds loans in its own portfolio.
The big bank boondoogle in the last few years was caused in part by the massive selling off of bad loans to unsuspecting agencies and pension funds. After all, if the bank did not have ownership anymore, what could go wrong?
The Federal reserve is trying to prevent another mess. It controls rules for what the banks hold and don’t hold. There are minimums of how much money they must retain in the form of assets. Recently they have increased the amount of capital banks must retain in proportion to money loaned out. These rules apply only to the biggest banks. It is forcing them to “portfolio” more loans. Maybe they will be more careful about who they loan to if they have to pay the piper.
