Where Does the Money Come From for Mortgage Loans?

In the past, obtaining a home loan often involved visiting a local bank or savings & loan institution where funds were available, and if you were considered a good credit risk, you could secure a loan directly from their own funds. However, the mortgage lending landscape has evolved significantly.

Today, the majority of home loans originate 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)

Here's how the process typically works now:

1. Loan Application: You apply for a loan with a lender, who processes your application, verifies information, and eventually grants you a home loan with regular mortgage payments.
2. Servicing: The institution where you send your payments is called the servicer. However, they may not own your loan. Instead, your loan might have been bundled with others and sold off to one of the institutions mentioned above. The servicer earns a fee from the investor for managing your loan.
3. Packaging and Sale: Your loan, along with many others, may be packaged into a pool and sold to Fannie Mae, Freddie Mac, or Ginnie Mae. The institution that originated your loan now has additional funds to lend to other borrowers.
4. Mortgage-Backed Securities: Fannie Mae, Freddie Mac, and Ginnie Mae may further break down these pools of loans into smaller increments known as mortgage-backed securities, which are sold to individuals or institutions on Wall Street. These securities provide investors with a share of ownership in the entire pool of loans.
5. Investor Distribution: When you make your mortgage payment, the servicer retains a portion, and the majority is passed on to the investor. If your loan is part of a mortgage-backed security, the investor receives a share of the payment.
6. Loan Transfers: Your loan may be transferred from one company to another, but this doesn't mean your loan is sold again. It simply means the right to service your loan has been transferred.

There are exceptions to this process, particularly for loans above $333,700, which do not conform to Fannie Mae and Freddie Mac guidelines. These non-conforming or "jumbo" loans are packaged into different pools and sold to different investors.

Overall, this buying and selling of mortgages and mortgage-backed securities is known as mortgage banking and forms the backbone of the mortgage business today.