The world of home financing is a multi-faceted one and we at Springs Homes would like to help you understand the ins and outs of the mortgage world. Much of the confusion and seemingly random nature of the home loan and mortgage process has to do with where the money comes from and how it flows. In this article we will discuss the various roles played in this process.
In general, there are three “tiers” in Mortgage Lending. I am going to refer to them as follows:
- The Origination Stage
- The Middle Man
- The Secondary Market
The Origination Stage:
There are five types of lenders in the Origination Stage:
1. Correspondent Lenders are companies that actually loan homebuyers the money they need to purchase a home. They have their own money and their own underwriters.
2. Direct Lenders are the “Big Guns” of the mortgage world, e.g. Chase and Wells Fargo. They have a division which functions as a Correspondent Lender in the Origination Stage. (This is confusing because they also have a department that packages the loans and offers them for sale to the secondary market.) They also have their own money and underwriters.
3. Brokers shop Direct Lenders to find you the best mortgage. They do not have their own money or their own underwriters. Once you have chosen the mortgage you want from the ones offered, brokers present your file to that lender and wait for approval.
4. Portfolio Banks originate loans, finance and keep some of them, and sell some to the Secondary Market. First Bank and ENT Credit Union are the major Portfolio Banks in Colorado.
5. Sub Prime: These lenders loan money that does not meet the guidelines of FNMA, FHLMC, GNMA. Rates and fees are usually high to offset the risk of the loan.
The Middle Man:
Once the loan is closed in the Origination Stage, lenders sell the loans to The Middle Man (or one of the Big Guns), like Wells Fargo or Chase. Those banks then package loans into huge portfolios of similar loans and sell them to the secondary market while retaining the servicing, another income stream for the Middle Man. Because FNMA, FHLMC,GNMA have a list of strict guidelines for the loans they purchase, each file is reviewed before it is added to a portfolio. These auditors are dedicated to reviewing each file. If the file doesn’t meet all the guidelines, the loan will be kicked back to the original lender. If the file is rejected for any reason, the Originating Lender is required to buy the loan back. The Originating Lender is then holding an “unsellable” loan, restricting their liquidity. This is why mortgage companies are fanatic about following all the rules.
The Secondary Market:
The secondary mortgage market is comprised of private and government agencies, which buy mortgage loans.
Fannie Mae (Federal National Mortgage Association, or FNMA) buys portfolios of conventional loans, with or without Private Mortgage Insurance from Direct Lenders.
Freddie Mac (Federal Home Loan Mortgage Corporation or FHLMC) buys portfolios of conventional loans, with or without Private Mortgage Insurance from Direct Lenders as well as portfolios from banks, savings and loans as well as Direct Lenders.
Ginnie Mae (Government National Mortgage Association or GNMA) buys portfolios of government loans, e.g. Veterans Administration (VA) and Federal Housing Administration (FHA) from Direct Lenders.
The purpose of the secondary market is to allow Originating Lenders to lend more money to potential homeowners. By purchasing loans from the Middle Man, Fannie, Freddie and Ginnie provide liquidity to those lenders, who can now offer more loans. Both Fannie and Freddie are limited to purchasing loans of $417,000 or less—this figure is reevaluated every year.
Once Fannie, Freddie and Ginnie have purchased the loans, they are converted into mortgage securities and bonds and offered as trading commodities. Because Ginnie Mae handles government guaranteed loans, their yield is generally higher than those of Fannie Mae or Freddie Mac.
There are of course multitudes of exceptions and guidelines can change daily, making explanations a challenge.