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Where Does the Money Come From for Mortgage Loans?

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 lying 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 with a home loan and regular 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.

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 Mae may do after they purchase the pools is break them down into smaller increments of $1,000 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 $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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Brenda Milleson, Greg Milleson
& Archie Lennon
Ann Milleson, BROKER

152 W. Main Street
New Concord, OH 43762
Phone: 740-261-9022 Fax: 740.261.9024
Email: bmillesonrealestate@yahoo.com   gmillesonrealestate@yahoo.com, archiel2010@hotmail.com

 

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"A special thanks to Brenda and Greg Milleson with Homeland Realty, Inc. for helping us find the home of our dreams. We moved to Ohio from Alabama. We told Brenda what we were looking for and our price range. She nailed it! She knew exactly what we were looking for. Two very special people!" Terry & Kerri Townsend
"Thank you for all of your help in buying my beautiful home. Buying or selling a home can be very stressful and you really made it seem easy. You were positive and responsive. Your ability to jump in and make sure things got done was amazing. It was a pleasure working with you. I would recommend you highly to anyone needing an excellent realtor." Suzanne Hale
"Brenda, I simply could not have asked for a better realtor to help me with my first home buying experience! You are so knowledgeable of your profession and you were always willing to go the extra mile. You patiently answered my numerous questions and were excellent at helping me work through the process! I can't thank you enough!" Lisa Grove
"Brenda was amazing and extremely helpful. My situation was unique because my house was divided between me and my three step daughters..................Brenda went way beyond the call of duty for me and I have recommended her to all of my friends. She became a very good friend throughout of this process and I am thankful we became acquainted. She's the best!" Bonnie Thompson
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Thank you Brenda for giving me your full attention in selling my house. I highly recommend you to others. Your professionalism yet personal consideration for others make you the best. A sale done fast and right. Best wishes for continued success!" Darlene Lake
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