It seems like the majority of the activity regarding mortgage loans goes on behind closed doors only known to mortgage broker. If you’re not actually part of the financial organizations you probably have never heard of some of the following. The money from mortgage loans travels from one institute to another and back again. The standard borrower is never made aware of the happenings that turn the big wheel of finances.
The three big institutions involved in providing funds for these transactions are Freddie Mac, Ginnie Mae, and Fannie Mae and you only interact with mortgage broker.
Secondary Mortgage Market Participants
There are four main participants in this market other than mortgage broker: the mortgage originator, the aggregator, the securities dealer and the investor.
One of the activities that are part of the system is “mortgage backed securities.” What the three “big three” do with the pools they purchase is they break them down into smaller parcels. There is little risk in these smaller packages because each loan is only a small part of a larger security.
These securities are then sold on Wall Street as safe investments with higher interest rates than bonds. Ginnie Mae bonds are securities that are backed by the mortgages on FHA and VA loans and by the selling of the bonds, the big three obtain new monies to purchase pools so lenders can get more money to lend to new borrowers.
Are you getting dizzy yet? The money just goes round and round.
The majority of your monthly mortgage payment is received by the investor while the servicer gets to keep a very small portion but since they work on such a grand scale they are handling billions of mortgage dollars. The money continues to move around from the investor back to the institutional investor.
Mortgage-backed security (MBS)
This institutional investor is usually involved in mortgage backed securities. Your particular loan may move around from company to company without you even knowing it. They all just want to service the loan because that’s where the money is. No one is actually trying to purchase any loans. More explained in this post.
There are particular types of loans that are the exception to the rule. They do not fall under the guidelines of Fannie Mae or Freddie Mac. These are very large mortgage broker loans which is why they are called “jumbo” loans. There are different pools and investors for these large loans and Freddie Mac and Fannie Mae are not involved. But the rest of the procedures are the same as for the smaller loans.
They are securitized and usually sold as mortgage back securities along with the others. All of these transactions add up to “mortgage banking” and the backbone of the mortgage business and is made up of this buying and selling of mortgages and mortgage backed securities.
In a matter of weeks, maybe a month, from the time a mortgage is originated it can become part of a CMO, ABS or CDO deal.
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