The Housing Finance System

A tremendus amount of money is needed by the mortgage industry to fund the large number of purchase and refinance transactions that take place each year.

chances are, the majority of those borrowers don't give much thought to where the money comes from or even how it is made available.

The following are some interesting behind-the-scenes facts and information. By now most of us know just how extraordinary the real estate market has been for the past ten yeas or more. Accordingly, the mortgage industry has also had phenomenal activity

Thus, in any given year, trillions of dollars in mortgage loans may be transacted, nonetheless, one may ask where does all that money come from?

A significant percentage of this money will come from what is called the secondary market. As a consumer, when you take out a mortgage loan for a purchase or refinance, you consult a local lender.

What most consumers don't realize, however, is that at some point after the loan has been secured, it may be "'bundled'" together with other loans and sold as a package into the secondary market.

The largest purchasers of these bundled or so called "packaged" mortgages in the United States are the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal National Mortgage Association (Fannie Mae). These two groups are referred to as secondary lenders, while local lenders are known as primary lenders.

However, there are other corporations in the secondary market besides Freddie Mac and Fannie Mae, but these two are the most notable.

Primary lenders typically do not have the extensive and continual flow of capital assets from which to offer consumers mortage loans.

And, it is likely that the primary lender could not survive as a business solely from the monthley mortgage payments of its borrowers.

Freddie Mac and Fannie Mae are considered secondary lenders because they purchase these loan packages from the primary lender and then sel them as mortgage-backed securities to investors around the world.

In order to understand the magnitude of the secondary market, these loan packages are multimillion or billion dollar bundles that are purchased by investors, such as insurance companies, pension funds, or international banks.

These mortgage-backed securities have become a popular investment because of their security and good rate of return. Freddie Mac and Fannie Mae will take the money gained from the large investors and lend it to primary local lenders by way of purchasing the primary lenders' loans.

This cycle helps the local lenders to continue to make daily loans, and thus stay in businss. In addition, it creates the yearly capital needed by local lenders so that millions of Americans can buy or refinance their homes.

Mortgage analysts have estimated that since the rise of the secondary market, these corporations have helped reduce mortgage interest rates by at least a half of a percentage point.

Since competition is what keeps prices down on consumer goods, competition with other lenders helps keep the price for loans lower. The cost of a loan is not just the fees, but the interest rates as well. Also, these mortgage securities are in competition with other investments, such as bonds and T-bills (treasury bills), which influence interest rates.

The national secondary market plays a vital role as it helps to replenish the loan pool.Without such system, there would be far fewer lenders because many of the smaller primarylenders would not have the necessary capital assets to offer loans.

Since a lendermay be likely to sell your loan in the secondary market, one should not be surprise if they are later notified to send their mortgage payment a company other than the one from which they originally got the loan.

Because Freddie Mac and Fannie Mae play such a huge role in the loan cycle, they also have the leverage to set guidelines as to what they consider is an acceptable loan risk.

Therefore, the consumer, will have to qualify for any conforming loan they are likely to purchase based on the guidelines they set.

All lenders, however, do not necessarily sell their loans to Freddie Mac or Fannie Mae. Another source of capital for the mortgage industry comes from what are called " portfolio lenders." They are lenders such as banks, Savings and Loans, and large investors who keep and service their own loans.

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