Where Does the Money Come From for Mortgage Loans?

Posted on

May 17, 2021

Share This
For More Information on the Author Paul Andrews, ERA Advantage Reality, CLICK HERE!

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 doesnt 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 arent 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.

Other Articles You May Like

Basics of Reverse Home Mortgage

Basics of Reverse Home MortgageA reverse home mortgage is a type of loan that allows homeowners to access a portion of their home equity without having to sell their home or make monthly mortgage payments. Unlike a traditional mortgage, the loan balance of a reverse mortgage increases over time and is typically only repaid when the homeowner sells the home or passes away.Differences from Traditional Mortgage Reverse mortgages do not require monthly mortgage payments, while traditional mortgages do. The loan balance of a reverse mortgage increases over time, while the loan balance of a traditional mortgage decreases over time as payments are made. Reverse mortgages are typically only repaid when the homeowner sells the home or passes away, while traditional mortgages are repaid over a set term. A Financial Solution for Seniors       For seniors, a reverse mortgage can be a great financial solution. It allows them to access the       equity in their homes without selling or giving up ownership.      Reverse mortgages are also a great way to supplement retirement income. They provide a steady stream of funds that can be used to cover living expenses.   With a reverse mortgage, seniors can enjoy their retirement years and have peace of mind knowing they have a reliable source of income.Reverse mortgages are also a great way to pass on wealth to heirs. The loan is paid off from the sale of the home, and the remaining equity is passed on to the heirs.Eligible homeowners obtain reverse mortgages for many reasons including:          Repairing or modifying the home to meet the physical needs of getting older         Supplementing retirement income to meet expenses         Managing the costs of in-home care         Paying off an existing mortgage         Paying increased bills due to inflation and economy         Paying property Taxes         Delaying Social Security         Providing a source of funds for living expenses in lieu of liquidating financial investments during     times of market downturn or disruption         Helping retirement savings last longer         Purchasing a retirement home  Recent ClientsA retired couple in their late 60s, John and Susan, were struggling to make ends meet on a fixed income, due to inflation and the cost of living increasing. They had significant equity in their home but were hesitant to sell it and downsize because of the current real estate market.  They decided to explore a reverse mortgage as an option to access their home's equity without having to sell it. The reverse mortgage allowed John and Susan to access their home's equity and use the funds to pay off their existing mortgage and cover their increased living expenses. They were able to stay in their home and maintain their quality of life, without having to worry about making monthly mortgage payments. Mary Anne, a retired infusion nurse, suffered some medical challenges and her insurance did not cover all of her additional expenses.  She decided a reverse mortgage was her best option. It allowed her funds to seek non-traditonal treatment and was able to eliminate the financial stress in her life, allowing her body to heal.A retired widow in his late 70s, James wants to stay in his home as long as possible. His home was mortgage free and he intends to leave it to his two children who live out of state. The reverse mortgage allowed him to access his home's equity and use the funds to make the modifications to continue staying in the home unassisted.It allows him the peace of mind knowing the has additional money to pay an in-home care giver if and when he needs one.He is able to stay in his own home and now worry about being a burden on his out of state children.  He expressed to me that feeling of relief is priceless.This article was submitted by Nicole Cramer with Anchor Funding, Inc.  Contact Nicole at 251-349-9891 or email her at nicole@cramergrp.com for more information about whether a reverse mortgage can work for you.

Time for tax-loss harvesting?

As you know, the gig economy has been booming over the past several years. If youre thinking of using your skills to take on a side gig, what should you do with the money youll make?Theres no one right answer for everyone, and the decisions you make should be based on your individual situation. And of course, you may simply need the extra income to support your lifestyle and pay the bills. But if you already have your cash flow in good shape, and you have some freedom with your gig money, consider these suggestions: Contribute more to your IRA. If you couldnt afford to contribute the maximum amount to your IRA, you may find it easier to do so when you have additional money coming in from a side gig. For the 2023 tax year, you can put in up to $6,500 to a traditional or Roth IRA, or $7,500 if youre 50 or older. (Starting in 2024, this extra $1,000 catch-up contribution amount may be indexed for inflation.) The amount you can contribute to a Roth IRA is reduced, and eventually eliminated, at certain income levels. Look for new investment opportunities. If youre already maxing out your IRA, you might be able to find other investment possibilities for your side gig money. For example, if you have young children, perhaps you could use some of the money to invest in a 529 education savings plan. A 529 plan offers potential tax advantages and can be used for college, qualified trade school programs, and possibly some K-12 expenses. Please keep in mind that potential tax advantages will vary from state to state. Build an emergency fund. Life is full of unexpected events and some can be quite expensive. What if you needed a major car repair or required a medical procedure that wasnt totally covered by your health insurance? Would you have the cash available to pay these bills? If not, would you be forced to dip into your IRA or 401(k)? This might not be a good move, as it could incur taxes and penalties, and deprive you of resources you might eventually need for retirement. Thats why you might want to use your gig earnings to help fund an emergency fund containing several months worth of living expenses, with the money kept in a liquid, low-risk account. To avoid being tempted to dip into your emergency fund, you may want to keep it separate from your daily spending accounts.   Pay down debts. Most of us will always carry some debts, but we can usually find ways to include the bigger ones mortgage, car payments and so on into our monthly budgets. Its often the smaller debt payments, frequently associated with high-interest-rate credit cards, that cause us the most trouble, in terms of affecting our cash flow. If you can use some of your side gig money to pay down these types of debts, you could possibly ease some of the financial stress you might be feeling. And instead of directing money to pay for things you purchased in the past, you could use the funds to invest for your future.As weve seen, your side gig money could open several promising windows of opportunity so take a look through all of them. Chad Choate III, AAMS828 3rd Avenue WestBradenton, FL  34205941-462-2445chad.chaote@edwardjones.com This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones, Member SIPC

Time for tax-loss harvesting?

Its been a bumpy year for the financial markets which means that some of your investments may have underperformed or lost value. Can you use these losses to your advantage?Its possible. If you have some investments that have lost value, you could sell them to offset taxable capital gains from other investments. If your losses exceed gains for the year, you could use the remaining losses to offset up to $3,000 of ordinary income. And any amount over $3,000 can be carried forward to offset gains in future years. This tax-loss harvesting can be advantageous if you plan to sell investments that youve held in taxable accounts for years and that have grown significantly in value. And you might receive some gains even if you take no action yourself. For example, when you own mutual funds, the fund manager can decide to sell stocks or other investments within the funds portfolio and then pay you a portion of the proceeds. These payments, known as capital gains distributions, are taxable to you whether you take them as cash or reinvest them back into the fund. Still, despite the possible tax benefits of selling investments whose price has fallen, you need to consider carefully whether such a move is in your best interest. If an investment has a clear place in your holdings, and it offers good business fundamentals and favorable prospects, you might not want to sell it just because its value has dropped. On the other hand, if the investments youre thinking of selling are quite similar to others you own, it might make sense to sell, take the tax loss and then use the proceeds of the sale to purchase new investments that can help fill any gaps in your portfolio. If you do sell an investment and reinvest the funds, youll want to be sure your new investment is different in nature from the one you sold. Otherwise, you could risk triggering the wash sale rule, which states that if you sell an investment at a loss and buy the same or a substantially identical investment within 30 days before or after the sale, the loss is generally disallowed for income tax purposes.Heres one more point to keep in mind about tax-loss harvesting: Youll need to take into account just how long youve held the investments youre considering selling. Thats because long-term losses are first applied against long-term gains, while short-term losses are first applied against short-term gains. (Long-term is defined as more than a year; short-term is one year or less.) If you have excess losses in one category, you can then apply them to gains of either type. Long-term capital gains are taxed at 0%, 15% or 20%, depending on your income, while short-term gains are taxed at your ordinary income tax rate. So, from a tax perspective, taking short-term losses could provide greater benefits if your tax rate is higher than the highest capital gains rate.Youll want to contact your tax advisor to determine whether tax-loss harvesting is appropriate for your situation  and youll need to do it soon because the deadline is Dec. 31. But whether you pursue this technique this year or not, you may want to keep it in mind for the future because youll always have investment tax issues to consider.   Chad Choate III, AAMS828 3rd Avenue WestBradenton, FL  34205941-462-2445chad.chaote@edwardjones.com  This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.Edward Jones, Member SIPC