A mortgage is very much a source of future cash flow, and as such these streams of cash are bought and sold on the secondary mortgage market, which is quite large. There are four major players in this market, and we'll take a look at each one and the role they play.
First is the mortgage originator. They are the original issuer of the mortgage, most often banks, mortgage brokers or mortgage bankers. Most banks or mortgage bankers will immediately sell new mortgages into the secondary mortgage market. In the case of large banks they may instead aggregate the mortgage for a short time before selling the entire package.
Mortgages are usually sold quickly while the interest rates are the same as those locked in on the mortgage, as if the rates change the value of the mortgage on the secondary market will change as well, potentially costing the originator profits. Those who aggregate their mortgages before selling them often do so by hedging against interest rate shifts.
The originator makes money in two ways on a mortgage, both on the initial fees paid when the mortgage is originates, and in a premium that other companies will pay to collect the interest rate fees on the secondary market.
Next is the aggregator. Aggregators are both large originators themselves, as well as purchasers of originations from smaller originators. What they then do with all these originations is form them into mortgage pools and securitize them into private label mortgage backed securities or agency MBS's.
Aggregators must also hedge their mortgages against varying interest rates throughout the process until the MBS is sold to a securities dealer as their fee for service. Aggregators make their profit by selling their MBS's at a greater price than what they collectively paid for the mortgages, which is largely contingent upon their hedge effectiveness.
Now that the MBS has been formed and passed on, next up is the securities dealers. Many brokerage firms have desks dedicated to this form of trading. Their main goal is to sell these securities to investors, making more money on them than what they paid to the aggregators. Seems like a lot of people are making money off of your mortgage no?
Lastly are the investors, the ones who ultimately keep these markets afloat. Investors come in many forms, be it banks (in a full circle move), governments, insurance companies and more. Their potential for return is based largely on the credit quality of the mortgages and the risks for interest rate fluctuations.
Within a matter of weeks or months, your mortgage has likely gone through this process, being sold and passed along to different owners multiple times, a process which very few home owners are aware of. Your mortgage may end up in the central bank of a foreign government, a hedge fund, or an insurance company in Seoul. The market is very large, with good room for both safe and even returns or higher risk investments that make many companies stand up and take notice of each new collection of mortgages that hits the market.
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