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.
