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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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