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The
Olden Days
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 laying 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 now:
You
talk to practically any lender
and apply for a loan. They do
all the processing and
verifications and finally, you
own the house and now you have a
home loan and you make 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
company you make your payments
to very rarely owns your loan.
They are the "servicer"
of your mortgage. They are
called the servicer because they
are simply "servicing"
your loan for the institution
that does own it.
You
see, 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 processing payments and
taking care of 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
billions of dollars of home
loans. Three-eighths of a
percent on a billion dollars is
a tidy income.
In
fact, mortgage servicing is
where lenders make the real
money. The entire system
of originating mortgages,
including wholesale lenders,
mortgage brokers and mortgage
bankers is designed so that
servicers get loans into their
portfolio -- hopefully at a
"break even" level --
but often at a loss.
Mortgage servicing is where they
make their profit.
Once
your loan has been packaged into
a pool and sold to Fannie Mae,
Freddie Mac, or Ginnie Mae, the
lender gets additional funds so
they can make more loans (to
service in their portfolio) and
sell to those institutions, so
they can get more money, and so
on....
This
is the cycle that allows
institutions to lend you money.
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