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Understanding the Path of Your Mortgage Loan

When your grandparents bought their first home, chances are they went to the local bank and it gave them the money to make the purchase. They signed a promissory note promising to pay the money back and they put the note in its vault and began collecting your grandparents’ monthly payments.

Things have changed dramatically in the mortgage lending business in the last few decades making it more complex. If you have a mortgage, you may have applied and received the loan from one bank only to find out you would make your payments to another bank. Then, you may have received notice that your bank had sold your mortgage to another bank…

    Following Your Mortgage to Wall Street

  • You apply for a mortgage loan to buy, build, or refinance a home. Lenders include banks, credit unions, and mortgage bankers.
  • Lender approves your mortgage and funds the loan. If the lender is a bank or credit union, the funds for the loan come from their deposits. If the lender is a mortgage banker that has no access to deposits, it accesses money to fund the loan from a credit line and then "warehouse" your loan for up to 60 days before selling it to secondary market investors, which can be Fannie Mae, Freddie Mac or other financial institutions.

    *Some specialized mortgages are kept by your bank in its portfolio and are not sold to investors. They are typically nonconforming loans that don’t meet the guidelines to sell on the secondary market. Examples include: jumbo loans and home equity loans.
  • Your lender sells your mortgage to a secondary market investor that packages it together with hundreds of other loans and resells the package as an investment vehicle to Wall Street.

    In the meantime, you make your regular monthly mortgage payment to your original lender or perhaps to another institution to which your loan was sold that “services” your loan. As a servicer, it earns a fee for collecting your payments, handling questions or problems with your loan, and managing reporting and year-end paperwork. It does not own your loan.
  • Back to the secondary market…Fannie Mae and Freddie Mac guarantee the mortgage-backed securities, as they are called, and agree to buy them back from the Wall Street investors if the mortgages default. They make money by assessing a fee for this guarantee.

Sources: www.cmpsinstitute.org, LA Times, www.dollarsandsense.org

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