<p>I am currently reading a book called "Austerity, the history of a dangerous idea" by Mike Blythe. I am not an economist, but I am interested to learn more. </p>

<p>Blythe writes (p.24): </p>

<blockquote>
  <p>"The old 3-6-3 model presumed that the bank that issued a loan to a
  customer held the loan until it was paid off, with profits accruing
  from the interest payments it received. But what if these loan
  payments could be separated out and sold on to someone else? What if
  many such loans, mortgages for example, could be bundled together as a
  pool of mortgage payments and sold to investors as an
  income-generating contract called a mortgage-backed security? That
  way, the bank that issued the loan could borrow cheaper and make more
  loans because the risk of the loan not being paid back was no longer
  on its books, and the borrower would get better rates. It was win-win,
  as they say."</p>
</blockquote>

<p>I don't understand how selling them to investors can borrow money cheaper. Is it the investors' money directly? For example, if I am a bank, can I raise private capital (i.e. from investors) with the agreement of giving them a mortgage-back security? </p>

<p>Thank you for your input! </p>

<macroeconomics><banking><securities>
How does a mortgage-backed security issued by a bank allows it to borrow cheaper and make more loans?
Johnathan
# How does a mortgage-backed security issued by a bank allows it to borrow cheaper and make more loans?

(Asked by: username_0 on 2020-04-14)

I am currently reading a book called "Austerity, the history of a dangerous idea" by Mike Blythe. I am not an economist, but I am interested to learn more.

Blythe writes (p.24):

> "The old 3-6-3 model presumed that the bank that issued a loan to a
> customer held the loan until it was paid off, with profits accruing
> from the interest payments it received. But what if these loan
> payments could be separated out and sold on to someone else? What if
> many such loans, mortgages for example, could be bundled together as a
> pool of mortgage payments and sold to investors as an
> income-generating contract called a mortgage-backed security? That
> way, the bank that issued the loan could borrow cheaper and make more
> loans because the risk of the loan not being paid back was no longer
> on its books, and the borrower would get better rates. It was win-win,
> as they say."

I don't understand how selling them to investors can borrow money cheaper. Is it the investors' money directly? For example, if I am a bank, can I raise private capital (i.e. from investors) with the agreement of giving them a mortgage-back security?

Thank you for your input!

**Tags:** macroeconomics, banking, securities

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## 0 answers

