How come when one Bank wants to sell a mortgage to another Bank the Equity is of no
consequence but, when the Homeowner wants to go shopping for another Bank to refinance all of the sudden Equity is a HUGE deal?
Why is that ?
= new reply since forum marked as read
Once the loan for the house is originated, the money that is transferred comes from the creation of bonds and for the most part, the creators of those bonds tend to be other financial institutions. The banks sell the mortgages to these institutions, not the bank down the street.
It isn't as if a bank is selling the mortgage itself to another bank, rather bonds are sold and bought, on a regular basis, between parties basically the world over. Mortgage bonds are structured differently than a standard Treasury Bond or a Corporate or a Municipal. They represent payment streams from perhaps hundreds of individual homeowners, as opposed to a single entity. like your local city government or a company.
The answer to the second part of your question is because a new loan is being originated and the refinancing typically pays off the old note. This paying off satisfies a portion of the pool of bonds I mentioned above, referred to as a "Tranche". The reason equity is a huge deal is because it represents established value - money already in the bank, so to speak - that the loan originator can rely on as a back-stop should the new loan go into foreclosure. It is a guarantee that there is some value the originator can recover and pass on to the bond holders.
Consider this scenario;
A developer builds 100 homes in a new area and all of them sell within a month or so of each other. Those 100 homeowners have their choice of various banks and other institutions to provide the original mortgage, but the banks themselves are generally using a small handful of other institution to actually supply the money that goes to buy those houses - institutions like Fannie Mae and Freddie Mac, etc. Those companies purchase the loan from the banks and essentially, immediately create and sell bonds. the proceeds from those bond sales is the actual money used to pay the homebuilder, who has to recoup the money he has already paid to the folks that actually put the houses up - carpenters, bricklayers, etc.
Now lets say that all 100 of those loans are 30 year notes. The fact is, the number of those 100 homeowners that will actually make payments on that same house or that same loan for 30 years is rather small. Some will pay off early because they refinanced. Some will pay off early because they sell and move away, some will go all the way to 25 years but pay off early. Historically, only a small number of those 100 will pay for the full 30 year term.
Each payment made on each of those mortgages goes to paying both interest and principal on the BONDS. The original bank rarely if ever holds that note for 30 years. They got the money from the likes of the Fannies and Freddies of the world and that is who ends up getting the monthly loan payments. Fannie and Freddie pass it on to the bond holders, be it a pension fund, a Mutual Fund, a foreign government or bank, or your Aunt Millie.
From Demeter's (one of DU's most prolific posters in the Economics forum and a notorious "perma-bear"
said in her post above;
Bullshit. No they can't. Bank one sold a BOND, not a mortgage and bank two bought a security that RARELY of ever has a "Put" option or the ability written into the originating documents of the bond that allow the holder to force the issuer to redeem early. It doesn't happen that way.
She also said;
Nonsense. The bank has passed the risk off to the the pool of bonds. Her statement about housing prices falling again is typical of this poster, but based on nothing more than her own distaste for the financial industry as a whole and is completely speculative. When? When will housing prices fall again? Next week? in 5 years? 20? She doesn't know. No one does. The housing bubble of a few years ago was a once in a century aberration. As is stated in the Investopedia link I placed below, "An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets."
Read more: http://www.investopedia.com/terms/m/mbs.asp#ixzz29iAd9Y2f
From Unblocks post above;
That and whether or not you have established yourself as a reasonable credit risk.
But then there's this;
More bullshit because it doesn't happen. The "appropriate price" isn't negotiated in the way this poster is suggesting. Since it isn't a single loan being traded, but rather bonds, the price is set via a bidding process that has to reference other bidding processes on similar securities that are happening all the time during the trading day. Bonds trade "Over the counter" and one bank isn't going to be able to sell these securities for dramatically more or less than they are trading elsewhere.
Again, more bullshit, as this is not at all how mortgage bonds are structured. The consideration that some may be "less than 50% likely to default" is already been taken and is worked into the basic structure of a pool of mortgage backed bonds.
http://en.wikipedia.org/wiki/Mortgage-backed_security
http://www.investopedia.com/terms/m/mbs.asp#axzz29i43vGlw
Edited previously for spelling.
But I want to add this;
For decades American homeowners as a group were considered by the worldwide bond markets as an EXTREMELY good risk because they could be counted on to reliably pay their monthly mortgage payments. That is why American originated mortgage backed securities were seen as so desirable the world over, tantamount to Treasury Securities themselves. In fact, they didn't even have a traditional "AAA" type rating. They were rated "Agency" which was comparable to a ten-year Treasury security. The bursting of the housing bubble had a dramatic effect on this trust. In the old days, the idea of simply "walking away" from a mortgage obligation was unheard of. The fact that it has become more common is not at all a good thing. Having said all that, it needs to be remembered that the overwhelming majority of Americans who have mortgages continue to make regular payments on them.
goddamn dirty bastards will feel my wrath 
