I have a question related to mortgages as investments.

[Pendrench]

Specifically, I have read several books about the Great Recession, and while most do a very good job describing the causes and impact that lead to the Great Recession, there is one issue that I have been wondering about that I have not been able to clarify:

Typically, when investors bought these mortgages, did they buy them at the face value? Did they buy them below face value? Or did they but them above face value?

For example, if a bank sold a $300,000 mortgage to an investor, did they typically sell it for $300,000 (and the investor expected to recoup the principle, plus the interest over the life of the mortgage)?

Or would the bank sell the $300,000 mortgage to an investor for less (let's say $250,000) so they would still make some money (and get this off their books), and the investor would (hopefully) make back the entire $300,000 principle, plus the interest?

Or would the bank sell the $300,000 mortgage to an investor for more (let's say $350,000) so they would make back all of the principle, plus some of the interest that they would have made if they held on to the mortgage?

In other words, not taking into consideration all of the complicated/shady/illegal manipulations that came later - I'm just trying to understand the basic underlying logic/process of how things were supposed to work - and how they typically did at the point when the banks sold these mortgages to investors.

Thank you.

Tim

[safeinOhio]

1. Snatched up at big

discounts, and the owner is still on the hook for the balance.

[Pendrench]

6. Thank you for taking the time to reply to my post!

This is outside my scope of knowledge, so I greatly appreciate the input.

Tim

[Kilgore]

2. The banks selling price is the principal and some portion of the future interest

For example if your $300k mortgage would generate $100k over its life, the selling price would be $300k plus a negotiated amount based on the quality of the asset and expected interest return. The bank has already made some profit on the origination fees and interest charged while they held it. They may make additional profit by continued services such as payment processing.

The wife has been in mortgage lending on both the residential and commercial sides for 20 years and she tells me banks on average keep the loans less than a year after origination before selling them in bundles to investors like insurance companies.

Hope that helps.

[JayhawkSD]

5. That would be a highly speculative sale.

in which the buyer would lose the amount they paid for "expected interest return" if the loan was paid off, which a very high percentage of home loans are, either due to refinancing, relocation, or financial/health hardship. There is risk even in recovery of the principal, and no legitimate investor is going to pay out based on such a flimsy expectation as "anticipated interest."

I think your wife has it right about the rapid sale of most mortgage loans, and about making money servicing loans after the sale, but I don't believe that investors today are buying mortgages at above face value.

[Pendrench]

7. Hi Kilgore - this is VERY helpful - thank you!

I had a feeling this was probably the case, but all the books that I've read (so far) did not go into this much detail.

Thank you again!

Tim

[JayhawkSD]

3. No simple answer.

They were not sold individually, for the most part. They were sold as part of larger "investment instruments." An investor would buy a multi-million dollar "instrument," some of which would be commercial paper, some of which would be bonds, and some of which would be a whole bunch of mortgages. All of this would be of varying quality; short term, long term, high risk, low risk, current on payments, behind on payments, etc, and it was up to the buyer to evaluate the whole thing and decide if the "instrument" was worth the price. Sellers always placed some really good stuff in the package, and threw in some real garbage that they wanted to get rid of.

We know now, of course, that much of the garbage they were dumping was bad mortgages.

So, no price was placed on any individual mortgage, they were just included as part of the larger "investment instrument."

Banks are still selling mortgages today. We got our mortgage from a credit union which promptly sold it to Freddie Mac. The credit union still "manages the loan" and we make our payments to them, but they are doing so in behalf of the land bank to which they sold it. These mortgages are sold at face value and the credit union is paid a fee by the mortgage holder to manage the account.

[Pendrench]

8. Hi JayhawkSD - thank you for the detailed reply!

As I've mentioned, I have recently been reading a number of books about the Great Recession:

Diary of a Very Bad Year
Too Big To Fail
A History of the United States in Five Crashed
Griftopia
The ABCs of the Economic Crisis
Stress Test

And I just started reading: Chain of Title

So I was trying to get a handle on the details that led to the crisis.

Thank you again!

Tim

[Kilgore]

4. Just a bit more info

Regarding your question on shady things. Again according to the wife, there were two contributing factors. First were loosened underwriting standards which lowered the quality of the loans. This means loans were made to folks who were marginal on their ability to repay, or the asset (home) did not support the loan amount. Second the ratings agencies who score the quality of the mortgages the banks sell did not give ratings that reflected the true quality of the loans.

May be a simplistic answer, but its what she saw.

[Pendrench]

9. Thank you for the additional post!

I was watching The Big Short - and I remember this scene:

Truly amazing.

Tim