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 $333,700 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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