When you take a loan, the bank can “sell” your loan to an investor. What does that process look like, and why would an investor want to buy loans?
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Real estate attorney here. I’ve litigated against dozens of banks over hundreds if not thousands of securitized mortgages.
In most instances, loans are bought and sold through a system called MERS, which is short for Mortgage Electronic Registration Systems Incorporated. MERS essentially acts as a trading platform for loans which are packaged into pools. The pools of loans are rated by risk and then sold for a premium or discount to various investor entities. These trades are virtually never recorded in any public place and getting information about the true owner of a loan is damn-near impossible unless you have a lawyer on your side.
Investors buy mortgages (or on the west coast, deeds of trust) because they are a relatively safe investment that are guaranteed by the value of the home. Although there are exceptions for purposes of this ELI5, when a home is foreclosed, it is put up for auction. If the highest bidder bids more than the balance due on the loan, the loan is paid off. Whatever money is left over after paying the loan is used to pay any other liens on the property, including taxes and 2nd mortgages. If there is still money left over from the bid after all those liens etc are paid, what’s left goes to the previous owner.
If no one bids as much as the mortgage, the investor in the loan (or their assignee) gets the property and all the other liens get wiped out without being paid.
So buying mortgage loans, so long as they aren’t upside down, is a very safe investment that generates great revenue not only through interest, but also through fees, penalties, and other charges. Happy to answer any questions people have.
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