Where Does the Money Come From for Mortgage Loans?
Where Does the Money Come From for Mortgage Loans?
In the "olden" days, when
someone wanted a home loan they walked downtown to the neighborhood
bank or savings & loan. If the bank had extra funds laying around
and considered you a good credit risk, they would lend you the money
from their own funds.
It doesn't generally work like that anymore. Most of the money for home loans comes from three major institutions:
- Fannie Mae (FNMA - Federal National Mortgage Association)
- Freddie Mac (FHLMC - Federal Home Loan Mortgage Corporation)
- Ginnie Mae (GNMA - Government National Mortgage Association)
This is how it works:
You talk to practically any lender and apply for a loan. They do
all the processing and verifications and finally, you own the house and
now you have a home loan and you make mortgage payments. You might be
making payments to the company who originated your loan, or your loan
might have been transferred to another institution. The institution
where you mail your payments is called the "servicer," but most likely
they do not own your loan. They are simply "servicing" your loan for
the institution that does own it.
You see, what happens behind the scenes is that your loan got
packaged into a "pool" with a lot of other loans and sold off to one of
the three institutions listed above. The servicer of your loan gets a
monthly fee from the investor for servicing your loan. This fee is
usually only 3/8ths of a percent or so, but the amount adds up. There
are companies that service over a billion dollars of home loans and it
is a tidy income.
At the same time, whichever institution packaged your loan into the
pool for Fannie Mae, Freddie Mac, or Ginnie Mae, has received
additional funds with which to make more loans to other borrowers. This
is the cycle that allows institutions to lend you money.
What Freddie Mac, Ginnie Mae, and Fannie may do after they purchase
the pools, is break them down into smaller increments of $1000 or so,
called "mortgage backed securities." They sell these mortgage backed
securities to individuals or institutions on Wall Street. If you have a
401K or mutual fund, you may even own some. Perhaps you have heard of
Ginnie Mae bonds? Those are securities backed by the mortgages on FHA
and VA loans.
These bonds are not ownership in your loan specifically, but a
piece of ownership in the entire pool of loans, of which your loan is
only one among many. By selling the bonds, Ginnie Mae, Freddie Mac, and
Fannie Mae obtain new funds to buy new pools so lenders can get more
money to lend to new borrowers.
And that is how the cycle works.
So when you make your payment, the servicer gets to keep their tiny
part, and the majority is passed on to the investor. Then the investor
passes on the majority of it to the individual or institutional
investor in the mortgage backed securities.
From time to time your loan may be transferred from the company
where you have been making your payment to another company. They aren't
selling your loan again, just the right to service your loan.
There are exceptions.
Loans above $227,150 do not conform to Fannie Mae and Freddie Mac
guidelines, which is why they are called "non-conforming" loans, or
"jumbo" loans. These loans are packaged into different pools and sold
to different investors, not Freddie Mac or Fannie Mae. Then they are
securitized and for the most part, sold as mortgage backed securities
as well.
This buying and selling of mortgages and mortgage backed securities
is called "mortgage banking," and it is the backbone of the mortgage
business.
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