Contrary to popular belief, a mortgage is not a service provided by a bank. It's a standardized product, assembled by specialist 'originators' for a supply chain of financial consumers. Thinking of it like a component in a factory (e.g., an electronic flow meter) better explains the industry's behavior.
A mortgage is not a monolithic loan but a collection of disaggregated risks, such as non-payment and servicing. The U.S. financial system has created separate markets for each risk, which are then sold to different buyers like government-sponsored entities and specialized servicing companies.
The primary role of GSEs (Fannie Mae, Freddie Mac) is not to lend money but to act as enormous insurance companies. They publish specifications for 'conforming' mortgages and then sell insurance against the risk of non-payment, which standardizes the mortgage product for the entire downstream market.
The administrative task of collecting mortgage payments is a separate component called a Mortgage Servicing Right (MSR). These MSRs are actively bought and sold, leading servicing to be consolidated among large, specialized firms. This is why the company you send your payment to often changes.
Counterintuitively, rising interest rates make mortgage servicing businesses more valuable. When rates rise, homeowners with existing low-rate mortgages are less likely to refinance or move. This provides the mortgage servicer with a longer, more predictable stream of payments, increasing the value of their servicing rights.
The primary function of mortgage securitization is to move long-term interest rate risk off bank balance sheets. Entities like pension funds, which have long-term liabilities and are less sensitive to short-term rate hikes, are better suited to hold these assets, creating a more stable financial system.