For the Week of December 9, 2018...
Do You Know Where Your Mortgage Money Comes From?
Mortgage companies and banks are working overtime these days processing new mortgages which raises an interesting question: Will they ever run out of money to lend?
The chances of that happening are virtually nil, thanks to a highly complex investment market for mortgages that has grown immensely since the 1970s. The key players in this game are "Fannie Mae" (Federal National Mortgage Association), "Ginnie Mae" (Government National Mortgage Association), and "Freddie Mac" (Federal Home Loan Mortgage Corp.). These agencies, along with several private companies, turn homeowners mortgages into investment vehicles for individuals, pension funds, insurance companies and other large institutions. Altogether, these investment groups make up the bulk of what is known as the "secondary market."
When a bank or mortgage company writes a mortgage, the loan is lumped with other mortgages in a bundle (or "pool") that is often sold to one of the agencies. With the sale of the mortgage, the bank or mortgage company again has money to lend to another home buyer.
Fannie Mae, Ginnie Mae, and Freddie Mac differ as to the type of mortgage bundle they buy and in the type of investment vehicle they use to attract investors. But the process they use is the same: Assembling large packages of mortgages and issuing securities backed by the mortgages.
While the original lending bank may no longer hold the mortgage it gave to a home buyer, it still services the loan. That means collecting the monthly payments, keeping escrow accounts to pay for insurance and property taxes, and through the agencies or companies that issued mortgage-backed securities paying investors.