@Anonymous wrote:
Well, I'm not sure if it helps the borrowers... but it certainly is a big business for the lender
It definitely helps borrowers. Do you think the banks have an unlimited supply of cash from their depositors to lend to home buyers? Selling mortgages to investors frees up the cash to make new loans. Yes, yes, yes, yes, this means that banks can be leveraged to the hilt, and yes, this is what contributed to the so-called subprime mess, but without this practice then money will no longer be available for new homebuyers.
Under more favorable market conditions, this practice helps everybody, but everybody also has something at stake. The sellers are helped, because it creates a more liquid housing market that allows them to sell their homes, but if interest rates go up to make the loans more attractive to MBS investors, then there is downward pressure on their selling price. The banks are helped, because they are able to make more loans and collect more interest, but if they make a lot of unwise loans then they could default on their obligations to investors. The investors are helped, because they get what they hope will be a good return on their investment, but if the banks default then they're out a lot of money. The retirement plans are helped, because many invest in MBSes and REITs, but they can lose money just like the big investors. The home buyers are helped, because they have access to money from the lenders, but they pay for it in the form of possibly higher interest rates and higher home prices because the housing market is more liquid.
TANSTAAFL: There ain't no such thing as a free lunch.