Everyone is constantly selling/flipping these loans but I guess someone has to be holding a pretty big bag at any given time… is the point that you don’t want to be holding that bag for too long? The whole thing seems crazy to me.
The federal reserve buys a lot of them actually. This was a big part of what "COVID relief" money that was printed was spent on.
No, the point is that from the seller's point of view, the return on a sold loan/pool is higher than if you kept the loans, because the buyers pay a premium for the privilege of buying, and that premium goes straight into the seller's pocket. Then they will use that pocket cash to go buy some (% of) other loans from originators in different industries / different geographic locations / other different characteristics that they can't originate enough of themselves to have a sufficiently diversified portfolio to satisfy investors and board members who are risk averse. It is not about passing off the risk entirely (credit unions have to retain at least 10% ownership for themselves, for example), since you are still going to buy % participation in other loans that have risk, but about trading out a large investment at a lower return for a smaller investment at a higher return.
The bag are bonds, invested into by funds that need bond exposure.
I don't think most people realize how big the MBS market is. Most of the damage in 2008 wasn't from reckless Wall St traders and financial engineering, it was simply from a decline in housing prices on the back of a bubble that was created by the US Govt.
A large portion of it was outright fraud by the mortgage brokers and the rating agencies. The agencies slapped everything as 'investment grade' so the worthless securities could get bankrolled by everyone's retirement plans.