The role of investors in the mortgage business

Making cheap money available to homebuyers

If you have been following the interest rates for residential mortgages lately (This article is being written in July 2003), you have noticed very low interest rates. Rates for a thirty year mortgage are lower than 5%. The fact that money is so cheap is not only the result of the current economic conditions and the Fed, it is also the result of governmental policies used to encourage homeownership and improve rental housing.

In order to do this encouraging, the government has chartered stockholder-owned corporations and controls another one, which together fund most of the mortgage loans in the American residential mortgage market. They are:

– The Federal National Mortgage Association, known as Fannie Mae.
– The Government National Mortgage Association (Ginnie Mae).
– The Federal Home Loan Mortgage Corp., or Freddie Mac.

All three of them buy residential mortgages and then use the markets to fund these purchases. They issue Mortgage Backed Securities and by their sheer size and to some extent the implied or explicit backing of the United States, they get very low funding costs making housing more affordable.

In addition to these government sponsored institutions, large banks also act as investors. In fact, my own loan ended up being owned by Wells Fargo on the other side of the country.

A quick fact about the selling of mortgage loans:

They are usually divided in two parts when they are sold. First, the mortgage note itself, and the mortgage servicing rights. Here is a definition of that term:

Mortgage servicing rights (MSR) are the rights to receive a portion of the interest coupon and fees collected from the mortgagor for performing specified loan administration activities. Upon sale of the related mortgage loans, the total cost of loans are allocated between the MSR and the mortgage loans.

Continue reading more on the subject of Mortgage lending behind the scenes:

Go to The Warehouse lending page
Go to Fraud in mortgage lending.