Why does a bank sell your mortgage?
Right after Marc Hill bought his first home, a townhouse north of Chicago, in the summer of 2019, he got a letter telling him his mortgage had been sold. He didn’t think much of it after Googling around.
“I read that was kind of normal. And then it happened again. And then again. And I was like, ‘Well, what’s going on here?’” he said with a laugh.
Recently, less than five years after his purchase, the mortgage on Hill’s townhouse changed hands for the fourth time.
“Welcome to the 21st century housing market,” said David Reiss, a professor of real estate finance and housing policy at Brooklyn Law School. Today, upward of 70% of mortgages are sold into the secondary market.
“A lot of people have a sense that mortgages work like they did maybe in ‘It’s a Wonderful Life,’” he said. “Where you walk into your bank and if they think you’re a good risk, they’re going to give you some mortgage, and that’s going to come from money that they have from deposits.”
Sometimes that is how it works. But for the most part, Reiss said, “instead of banks lending you money that they have in deposit, once the bank makes the mortgage they then sell it to investors.”
When the bank or lender that originated your mortgage sells it, they get back all the money they lent you right away, plus a chunk of the interest you’re expected to pay over the life of your mortgage. They also get some of your closing costs.
“If every mortgage were held on a bank balance sheet, that would not leave banks with a lot of space to finance other types of loans,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. Because for every loan a bank holds on to, it’s required to keep a certain amount of capital in its reserves to cover potential losses.
“What we’ve discovered through history is that actually, funding a mortgage by using deposits, it’s a bit of a mismatch, right?” Fratantoni said. “Because deposits tend to be very short-term.”
And most mortgages in the U.S. are long-term loans, designed to be paid off slowly over 30 or so years.
“Some banks are good at originating, and they don’t have the capacity to hold these loans on their balance sheet,” said Anthony DeFusco, associate professor of finance at the University of Wisconsin-Madison. “And so it frees up resources for them if they sell your loan.”
There’s another big reason banks sell mortgages too, and it has to do with risk. Say the bank gives you a loan and holds onto it, then you stop making mortgage payments and go into default. Then the bank is on the hook. But if it sells your mortgage, the loan gets bundled together with other mortgages into what’s called a mortgage-backed security.
“It’s basically just taking a bunch of loans, putting them in one pool and sending the payments from all of those loans to an investor,” DeFusco said. “Just think of it as a pot of loans.”
And that pot of loans is insured by the federal government. So an investor who buys those mortgage-backed securities doesn’t have to worry about you defaulting the same way a bank would.
When you take out that credit risk, said John Mondragon, a research adviser at the Federal Reserve Bank of San Francisco, “it makes that asset, the loan, much, much more liquid.”
That liquidity is key to the whole housing market. The fact that banks know they can write mortgages, sell them easily into the secondary market and make money, is why you can always get a mortgage. As long as you qualify, that is.
“At the end of the day, it does increase the supply of mortgage credit,” Mondragon said. “It makes them cheaper, and it makes more mortgages possible.”
In theory, it shouldn’t affect homeowners that much when their mortgage is sold, economists and lenders say — the terms of the loan, and the interest rate, stay the same. What people are more likely to notice is if their servicer changes.
“When your mortgage gets sold, you just get a letter saying, you know, Fannie Mae has purchased your loan, they bought it from so and so,” Mondragon said. “Your servicer is going to be a whole change in the way you interact with your loan. That is you’re going to be making payments to a different entity than what you were doing before.”
Sometimes the mortgage and servicing rights are sold together, sometimes separately. Companies that just do the servicing generally make their money by charging a fee to whoever owns the mortgages.
In Illinois, Marc Hill’s servicer just changed hands this month for the fourth time since he bought his house in 2019.
“It’s annoying more than anything,” he said.
Every time it happens, he has to set up a new account — and do some research to be sure the new company is legit. He’s also always worried something is going to fall through the cracks, like his homeowner’s insurance did the first time his servicer changed.
“My agent actually gave me a call like, ‘Hey, we didn’t get our money for your insurance. Your home is no longer insured,'” Hill said. “I’m like, ‘Oh! Well, thank you, thanks for telling me that. Let’s get that taken care of!’”
He now pays his insurance directly instead of having his servicer do it for him.
There’s nothing homeowners can do to prevent their loan, or servicing rights, from being sold. “That is the way it’s been structured in order to facilitate this really liquid mortgage market,” said Mondragon at the San Francisco Fed.
Frustrating as it can be to have your mortgage change hands over and over, economists and lenders say this very liquid market probably helped you get a mortgage — at a lower interest rate — in the first place.
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