Similar to the capital markets, there exists a "primary" market for mortgages and a "secondary" market as well. You will be very familiar with the primary market – that is the market you deal in when you first get a mortgage or negotiate the terms of your mortgage renewal with your local bank (or other mortgage provider, like a trust company, etc.).
But you may be surprised to find out that even though your mortgage statement reads "Royal Bank" or "Wells Fargo" or whomever your mortgage provider is, they may no longer actually hold your mortgage. Sounds confusing?
Well, what normally happens these days is that a bank will group a whole bunch of mortgages with similar terms, renewal dates and interest rates and package them together in a bundle and then "securitize" them – or in other words sell these packages to investors. These "packages" are known as "Mortgage-Backed Securities" or MBS’s. The banks do this to free up cash for operations and investments, etc.
The actual mortgages still appear to be owned by the bank since their names still appear on the statements – but the securitization of the mortgages involves retaining the bank as the operator for accounting, reporting and collecting payments on these mortgages on an agency basis. This is mainly for the optics (people may go berserk if the name on their mortgage statement changes every 6 months) and the existing infrastructure that the banks have make it more efficient for them to maintain the administrative duties.
You would be surprised how many employees at your bank won’t know this information! :)
My post tomorrow will be on Mortgage-Backed Securities and how and why you would buy them as an investor.
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As a mortgage holder is there any way to find this information? Does it even matter?
You would have to go pretty far up the tree inside the bank to find out – and quite honestly the amount of run-around you would get would be enormous. I can’t imagine finding the information would be easy or quick by any stretch of the imagination.
Having said that – Does it matter? It hasn’t yet – and it probably won’t ever matter.