How do banks or mortgage institutions make money by selling my mortgage?
In short, once a loan (mortgage) is secured to your property (collateral), your Promise to Pay (note) becomes an income source for the bank (monthly payments). As highlighted in the federal RESPA disclosures and agreement you signed when accepting the loan agreement, the original mortgage company can transfer certain aspects of your loan such as who "owns" the debt or who "collects" your payments, etc. RESPA guidelines stipulate that you, the borrower, be notified of these re-assignments in writing.
Why does this happen? The answer is pure business. Like any other product or service, your mortgage has a value that, based on demand, is higher than its face amount. When your mortgage company sells your loan, they are cashing in on that value, usually by marking it up and selling it.
Another way your mortgage company profits is by lowering its own cost of ownership. By transferring the right to collect your mortgage payments, for example, your mortgage company assigns the costly servicing aspects of your mortgage to companies who specialize in handling mail, taking and making phone calls, generating statements, accepting payments, etc. (you get it).
Who benefits? In short, everyone' mostly. The ability to commoditize mortgage loans creates a market for their resale. In the past, since most mortgages were made and kept by the same lender, lenders profit potential was limited to the premiums charged to the borrower (the interest rate).
As such, rates were higher and mortgages were MUCH harder to get. With RESPA, mortgage lenders have many additional sources of profit available for their mortgage holdings so you, the consumer now have more choice, flexibility and lower overall cost of borrowing.
Some lenders still do business the old way, holding and servicing their mortgages in a Portfolio (ask your next lender about it). As annoying and disconcerting as all those transfer notices may be (mistakes have been made on the lender side, so be vigilant), remember that this is one of the facets of modern lending that makes mortgages possible.
This topic is covered in greater detail elsewhere in the MND WIKI.