The amount of money floating around in the financial markets is absolutely astounding. Banks rarely even hold mortgages anymore, they simply provide the customer with a mortgage then package it up with other mortgages and sell them all off to a brokerage firm. The firm then packages them with other mortgages and markets the entire bundle as a multi-tiered security.
At that point, the original bank is only responsible for collecting and passing along payments from the customer to the brokerage (and they get a fee from the brokerage firm for their service). The brokerage then takes out their cut of the payment and pays out the rest to their investors in the form of dividends.
The upside to this is that it frees the bank from any liability for the mortgage. They don't have to set aside liquid assets to cover for the risk of a foreclosure (banks have to set aside 15-20% of their outstanding loans to cover defaults) and the loan balance is repaid immediately by the brokerage, so they can use that money to fund another loan. The cycle gets pretty vicious.
The downside is that it distances the mortgage owner from the individuals that are holding the bag. The bank still acts as the "face" of the mortgage, but they are at least two steps removed from the financiers of the mortgage.
Moreover, having more individuals with their hand in the bag can lead to problems like the current subprime lending mess. Since the bank isn't responsible for the mortgage once it is packaged and sold off, they'll do everything in their power to sell a mortgage without regard to the quality of the mortgage. They couldn't care less if the buyer can't afford the mortgage because they aren't left holding the bag when the buyer defaults on the loan.
- The loan officer will sell a mortgage to anyone to get the commission, even if they have to fudge some numbers (like the buyer's income) to get it done.
- The bank is pushing the loan officer to make sales so they can sell off the mortgage and get their cut. They are usually paid a flat percentage fee on the price of the mortgage, plus the closing costs they tack onto the mortgage and a perennial service fee for accepting and processing payments.
- The loan distributor pushes the bank to make sales because they need a certain number of mortgages to package as securities and sell off to brokerages.
- The brokerage pushes the loan distributor for mortgage securities that they can purchase, split, and sell. The brokerage splits the securities into tiers and sells shares of those tiers to investors. The highest tiers get the lowest interest rate, but they get paid first. The lowest tiers get the highest interest rate, but they get paid last and assume the highest risk in the event of a default.
Does that make the least bit of sense? Every level of the mortgage market pushes the lower level to sell more, more, more! This ultimately leads to lower quality mortgages and predatory lending practices.
This, by the way, should by no means be misconstrued to indicate that I'm placing the blame entirely on the lenders, banks, distributors, or brokerages. The purchaser of the mortgage is ultimately responsible for paying back their debt and there is no excuse for not understanding the terms of their mortgage.
-b0b
(...learned a thing or two in banking.)