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?
In: 293
The mortgages are assets on the banks books. However mortgages are not all the same. Some are good loans, some are iffy. Banks will package up the loans, put the good and some of the bad together, take the cash payment and clean up their books.
One point I didn’t see mentioned yet is for expected payoff benefits. Risky loans have high rates to offset the higher probability of not getting paid back — lets say 50% chance of default for an easy example. If you bundle two risky loans, the probability the whole portfolio defaults is still the same independently, but the expectation of full default becomes only 25% (0.5*0.5), so you’ve “reduced” the full default probability by doubling the portfolio size which increases your expected return. You can then sell claims to this “bundle” with a higher expected return to investors as a product.
Note that default rates are probably not actually ever that high for loans like mortgages, and the risk in the event of loss is usually not the entire loan’s balance.
In practice mass defaults tend to be downwardly correllated (recessions, and macro events like 2008 are obvious examples) but this practice is a general benefit.
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