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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.
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.
Loans above $300,750 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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Types of Lenders
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copyright 2000 by Terry Light and
RealEstate ABC
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