Raise your hand if you know why your mortgage is sold from one lender to another? Now, some of you will surely know the answer and some of you won't have the foggiest idea. Either way, you are not alone.
In considering writing an article about mortgage backed securities, I realized that the concept of bundling mortgages into securities for sale to investors is probably like another language to most people. I know loan officers that don't really understand the concept, so I thought a simplification was in order.
Here goes nothing -
If you are a homeowner and have ever had your mortgage sold from ABC Mortgage to XZY Bank you are on your way to understanding the bigger picture.
Mortgage loans, like the one you took ABC Mortgage are purchased and then packaged into bundles (most commonly on residential property) by governmental, quasi-governmental, or private entities. That group then issues bonds that represent claims on the principal and interest payments made by borrowers on the loans in the bundle, a process called securitization. The sale of these bonds liquidity to a relatively illiquid asset(your loan by itself) and that capital can be used to finance other things. In simple terms, the sale of these bonds creates cash and cash makes the world go round!
Now there is much more to this picture but this is probably a good start to understanding why your home loan changes hands. In part 2 of this article we will look at how these mortgage backed securities tie-in to the sub-prime loan situation.
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