Where Does the Money Come
From for Mortgage Loans?
Mortgage Backed Securities
Once Freddie Mac, Ginnie Mae, and Fannie purchase the pools, they break them down into smaller ownership parcels. These are called "mortgage backed securities." Each security represents a small ownership interest, not in your specific loan, but in the pool of which your loan is only one part. The risk is therefore diversified and it is a very safe investment.
The mortgage backed securities are sold on Wall Street to institutions or individuals looking for a safe investment, but one that earns a higher interest rate than treasury bonds. You may even own some as part of your retirement fund or investment portfolio. Perhaps you have heard of Ginnie Mae bonds? Those are securities backed by the mortgages on FHA and VA loans.
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 $417,000.00 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.
Types of Mortgage Lenders
It used to be fairly easy to put a term to a lender that accurately described them and the types of mortgages they originated. Time, the S&L problems of the late eighties, and a maturing marketplace have served to "blend" those differences. Some old adjectives barely apply now and are rarely used.
Mortgage Bankers
A true Mortgage Banker is a lender that is large enough to originate loans and create pools of loans which they sell directly to Fannie Mae, Freddie Mac, Ginnie Mae, jumbo loan investors, and others. Any company that does this is considered to be a mortgage banker. They can very greatly in size. Some may service the loans they originate, but not all of them will. Most true mortgage bankers have wholesale lending divisions.
Examples of two of the largest mortgage bankers are Countrywide Home Loans and Wells Fargo Mortgage. One is associated with a bank and the other is not, but both are most correctly classified as mortgage bankers.
A lot of companies call themselves mortgage bankers and some deserve the title. For others, it is mostly marketing.
Mortgage Brokers
Mortgage Brokers are companies that originate loans with the intention of brokering them to wholesale lending institutions. A broker has established relationships with these companies. Underwriting and funding takes place at the wholesale lender. Many mortgage brokers are also correspondents, which is why many of them also claim to be mortgage bankers.
Mortgage brokers deal with lending institutions that have a wholesale loan department.
Wholesale Lenders
Most mortgage bankers and portfolio lenders also act as wholesale lenders, catering to mortgage brokers for loan origination. Some wholesale lenders do not even have their own retail branches, relying solely on mortgage brokers for their loans.
These wholesale divisions offer loans to mortgage brokers at a lower cost than their retail branches offer them to the general public. The mortgage broker then adds on his fee. The result for the borrower is that the loan costs about the same as if he obtained a loan directly from a retail branch of the wholesale lender.