As long as I’ve owned a home, I’ve had a mortgage. The mortgage I generally have had is usually through whatever lender came through at the time of my home purchase, but isn’t necessarily one of my choosing – it hasn’t mattered much on the company though, because as long as the mortgage rate was what I agreed to, it didn’t matter to me. Within a year or so of buying the home and establishing the mortgage, it always seems that the initial lender “sells” off the mortgage to another institution or bank. When/if that happens, the new company assumes the same terms and my mortgage remains unchanged. Same thing when I have refinance the home – the refinance company comes in with a better rate (used to, at least) and within a short time frame, sells the mortgage off to another company. To make things even stranger, this has happened to me even with an established mortgage of several years with the same company/bank. I can’t fathom why/any benefit the banks get from doing this.
TL;DR: why do banks sell/transfer mortgages around if there is no change to your term? How does it benefit them?
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No different than buying/selling stocks, bonds, commodity futures or any other financial instrument. They’re making bets on the value of that instrument increasing, diversifying their portfolio, adjusting their risk levels or whatever else.
Say you work at a bank and have some cash on hand. Obviously that’s money that should be loaned out. It could be earning a return but it’s currently not. Ok, so you find a borrower who meets the least stringent requirements you have in terms of likely return because, hey, that’s better than nothing.
Tomorrow another borrower turns up whose expected return is much higher. Well, sucks for you because you don’t have money to lend. It’s just been lent to the previous borrower. However, you could sell that loan to someone else to get cash to lend to the new borrower.
This is just an example, but the general answer to your question is “the bank needs liquidity for some reason.”
Banks can only lend out a certain amount of money based on their reserves (basically money they have on hand). Once they lend their capacity, they can’t lend anymore until after they’ve reduced the amount of money they have lent out. If they sell the loan to another financial institution, they reduce the amount of money lent out and simultaneously get an infusion of cash. Both of these allow them to write more loans.
Now why do they want to write more loans rather than just get the interest on the already outstanding loans? Fees are a big part of the answer – the banks earn fees for writing the loans and they get those fees up front and don’t have to wait for decades of interest payments. Secondarily, getting paid now (by selling the loan) eliminates the risk of non-payment down the line. Of course this risk is priced into the sale of the loan, but again, cash in hand is what the banks really want.
Then there’s the issue of big and small institutions. A smaller institution with a small number of outstanding loans will take a big hit if just a few of those loans go bad. A giant institution with thousands or tens of thousands of mortgages can manage the risk of loans going bad far more easily – “normal” default rates simply don’t pose an existential threat to large institutions in the same way they do to smaller institutions. So a big institution is willing to take more risk on a given loan or portfolio than smaller institutions, and that difference in risk tolerance allows for smaller banks to “give up” a bit of potential profit which is earned by the bigger institutions. And then bigger institutions can spread the cost of loan servicing (workforce, equipment, office space, legal costs, etc.) among far more loans, driving down the per loan servicing cost.
Your mortgage is a stream of monthly payments, say 2k/month for the next 30 years (360 months). At the simplest level the bank sells the mortgage to someone else to make more lump some money today, and then the other person assumes the risk/hassle/annoyance/time of collecting the remaining (say) 359 payments. A bird in the hand is worth 359 payments in the bush.
Now, at a slightly more complicated level what is often happening is the mortgage will get packaged up with a bunch of other similar mortgages into a security (i.e. a tradeable agreement to service (say) 100 specific mortgages of similar risk) and this gets sold/traded. So your mortgage starts off just as Mortgage on Jack’s House at the bank, but then becomes mortgage 98 in a Mortgage Backed Security by a specialist company that buys mortgages from banks and packages them into MBS’s and sells them.
Then this MBS containing your house as mortgage 98 might be divided up into various risk levels and those can be sold/speculated on as well. For example, someone might pay to be the person that gets paid last in line (so if anyone fails, they start losing money, BUT if no one fails they bought 2% of the income stream for (say) 1%.
A bunch of other stuff can happen as well, but from your end what you want to realize is that your income stream represents value and risk and some people want the value now, others want it later. Some people are willing to take the risk of you going broke in 20 years, others aren’t. As people change they desire to make money now vs later and their risk they buy/sell mortgages.
I work at a bank. Lots of wrong answers in here.
A bank does not need to have the “cash on hand” to make a loan The entire fractional banking and Federal Reserve system exists to provide liquidity in the bank system wherever it is needed. They are not selling a mortgage to get the money to make another mortgage. Banks do not work like your household budget that way, they are part of a federal reserve banking system.
Banks sell mortgages as part of their risk mitigation strategy. That’s it. Mortgages are loans like any other loan and all loans carry risk. There are a bunch of really smart quant’s and financial analysts that work in Risk (2 floors above me at the moment) and run models all day long simulating market conditions, forecasts, acceptable risk levels, etc etc and if they see a flag show up on their models, they move to de-risk their assigned portfolio, which includes moving some assets off the books and selling them. I work in credit card design, origination and marketing and am very, very familiar with the information we need to provide Risk before anything we want to do is approved.
Go watch the movie Margin Call. The entire movie is basically about this happening during the mortgage crisis, a financial institution owning to many risky assets and having to dump them to other banks to de-risk their portfolio or risk bankruptcy. And it’s a pretty entertaining movie too.
It happens when an SVP wants to pull a nice bonus to fund their executive lifestyle.
Same goes for inflation.
Banks make their money by processing payments not rate. They can either take a bit each month for years or sell it to someone else who pays them a lump sum for that anticipate future value. Most loans are not made using the lenders money in the long term. Banks and independent mortgage companies securitize those loans with Fannie Freddie Ginnie mae and recoup the principal. A portfolio loan made with the banks money is a very small piece of the overall residential lending first mortgage market.
I lend you $100 in return for you paying me back $1.05 per day over 100 days. After 100 days, I’ve profited $5 and you are debt free. This took 100 days.
Alternatively, I lend you $100 in return for you paying me back $1.05 per day over 100 days. After 10 days, I’ve profited $0.5 but I sell the loan to Bob for $0.1
I’ve profited $0.6 over 10 days, Bob profits $4.4 over the next 90
It’s essentially just a trade between short term and long term interests.
The complexity in reality is typically around loans being sold/bought where the person borrowing isn’t amazing at paying back their loan. So the bank can sell the loan at a significantly discounted value to a debt collection business with very aggressive collection behaviors.
Imagine buying a $450,000 mortgage from a traditional bank for *significantly* less than $450,000 because the bank deems the borrower unlikely to pay it back, and the bank will start losing money fast as they themselves likely are paying interest on loans to in turn provide to the borrower. Let’s say the borrower now owes you $450,000 for a loan that you bought for $100,000 and all you have to do, is spend less than $349,999 to claw back the debt to make a profit, *or* find someone willing to buy the debt, again, for more than $100,000
You do versions of this long enough and with republican oversight, you get the 2008 subprime mortgage meltdown. But a few people made *a lot* of money.
I think it’s interesting to look at this the other way around.
Consider lotteries where the big-prize winner has the option of taking a lump sum now, or an annuity for however many years.
Usually the annuity pays out more overall, but the lump some pays out more now. So on one level, the annuity appears to make a lot of sense. But if you have some financial literacy – or better yet, hire a professional, you can grow that lump sum faster than the annuity.
So for your bank, your mortgage is essentially an annuity. It will pay out more than a lump sum, eventually. But if they have some financial literacy, they should be able to grow the lump some into something more productive. And generally the banks do believe they have some financial literacy.
So when the bank sells your mortgage, from their point of view, they’re converting that annuity into a lump.
The flip-side of this is why anyone would buy them. This comes down to different investors having different risk-tolerance. a 20yo with their whole life to fix their mistakes can make risky calls – a 50yo with their retirement looming can’t accept the same risks. “mature” mortgages are less risky, so they can go find a nice peaceful fund to mature in.
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