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The Lowdown: Where Mortgages Come From, All the Way to the Top

Nov 9 2021

Contents

Where do mortgages come from?
The secondary market
The primary market
Mortgage brokers
Mortgage servicers
Shopping for a mortgage


If you’re starting to look into taking out a mortgage to buy a home, things can get confusing pretty quickly.

There are banks, mortgage companies, brokers, and credit unions, all offering “great deals,” not to mention those other names you keep hearing: Ginnie Mae, Fannie Mae, and Freddie Mac.

Together with Framework® Homebuyer Education, we’re here to help sort out the players and get you ready to navigate your mortgage application journey as smoothly as possible.

Let’s start by answering one simple question: What is a mortgage?

Mortgages make it possible for regular folx to buy homes with relatively little cash.

A mortgage is a special type of loan that’s used for real estate. If you don’t make payments on your loan, the lender has the right to foreclose on and take ownership of your home to satisfy the debt. That’s why it’s so important to buy a home with monthly payments you can afford.

Where do mortgages come from?

As you’ve likely come to realize, the origin of a mortgage loan is a little complicated.

First of all, lenders need to have large sums of money for you to borrow for a long period of time. If a local bank used all of its personal bank account deposits to provide mortgages, it would quickly run out of money to lend. (Actually, it’s happened — but that’s a story for another time.)

Instead, your ability to get a mortgage depends on what’s known as the “secondary market.” This is the place in which mortgage lenders, called “originators,” sell loans they’ve made so they can replenish their funds and offer more loans.

The secondary market

When you’re shopping for a mortgage, you’ll need to meet certain requirements to qualify for a loan. These can include how much debt you have compared to your income and what your credit score needs to be.

Well, these terms typically aren’t set by the mortgage lenders themselves. Instead, they’re determined by what’s referred to as the secondary market, which is regulated by the federal government.

Here’s how it works:

The biggest names to know in the secondary market are Freddie Mac, Fannie Mae, and Ginnie Mae.

While they don’t actually lend out mortgages, these entities buy them from the banks, mortgage companies, credit unions, and other sources that lend directly to consumers (you).

They then package them into securities to be sold to investors with a guarantee of full repayment of principal and interest.

What's a security?

Securities are financial instruments like stocks and bonds. They’re typically bought and sold by investors through brokers.
A mortgage-backed security (MBS) is a bond consisting of a group of mortgages that are pooled together. MBS investors are entitled to the monthly interest and principal payments that consumers make on those mortgages.
Today, most MBS are guaranteed by the agency that issues them. Fannie Mae, Freddie Mac, and Ginnie Mae are agencies that issue MBS with guaranteed payments to investors.

It’s like this: If a bank says it has this Fannie Mae mortgage, that Freddie Mac mortgage, and this Ginnie Mae mortgage available to apply for, it doesn’t mean those mortgages are actually being offered by those entities. Instead, it means the bank is offering mortgages that are tailored to meet each of those agencies’ standards.

Fannie Mae and Freddie Mac are technically Government Sponsored Entities (GSEs). GSEs are private companies that were created by Congress to ensure that there’s enough money to fund mortgages everywhere in the country at all times. They’re basically private companies whose purpose and activities are determined by the government.

Ginnie Mae, meanwhile, is a government-owned company, which is slightly different than a GSE. The bottom line, however, is that thanks to the existence of Ginnie Mae, Fannie Mae, and Freddie Mac, homebuyers can rely on the consistent availability of mortgages all over the country.

All three of these secondary market players are subject to federal government rules that, among other things, each year set the maximum amount of money that Fannie, Freddie, and Ginnie are allowed to spend on each individual mortgage.

These maximum loan amounts are called the conforming loan limits. In 2021, the conforming loan limit for a single-family home is $548,250, or $822,375 in high-cost areas.

Mortgages equal to or less than the conforming loan limit are called conforming loans. Mortgages for more than the conforming limits, meanwhile, are jumbo loans.

Other mortgage qualifications that the secondary market sets the standard for include the allowed:

  • Debt-to-income ratio: The maximum percentage of your gross monthly income that can be spent on the mortgage payment and all other debts
  • Loan to value ratio: The relationship between the loan amount and the value of the property, used to determine the minimum down payment

The primary market

Your mortgage lender (technically called a “mortgage originator”) is part of the primary market. That’s where you go to shop for a mortgage.

When you go to take out a mortgage, you’ll probably notice that you have basically three options: A bank, a mortgage company (such as LoanDepot or Quicken Loans), or, slightly less commonly, a credit union.

Here’s a breakdown:

  • Banks occupy about 40% of the mortgage market. Banks use customer deposits to fund mortgages (and other loans, like car and business loans). Not all banks offer mortgages, but those that do typically have some loans that they’ll sell in the secondary market and others that they do not. Sometimes a bank’s own mortgage options have greater flexibility as they do not need to meet secondary market standards. It’s always good to ask about all the options they have available.
  • Mortgage companies (sometimes referred to as “mortgage banks”) represent about 50% of the mortgage market. They do not take deposits or offer savings and checking accounts. What typically differentiates mortgage companies from banks is the source of money they use to make their loans. They don’t take deposits or offer savings and checking accounts, so they have to borrow it from something called the short-term credit market. They must sell all their loans in the secondary market.
  • Credit unions are member-owned depository institutions. That means they take deposits like banks do, but they are nonprofits that operate for the benefit of their depositors. They have less than 10% of the mortgage market, but their share is growing thanks to their strong customer service and attractive loan options for members.

Mortgage brokers

Along with the primary and secondary market, another aspect of the mortgage ecosystem is the mortgage brokers.

When you set out to buy a home, you may hear people ask if you’re going through a mortgage broker, but you may not understand what a mortgage broker is, or you may be vaguely aware of an untrustworthy reputation.

Mortgage brokers are licensed to act as go-betweens, matching you (the consumer) with lenders in the primary market. Their fee for this service is part of your closing costs.

The benefits of using a mortgage broker can include:

  • The convenience of working with a professional who reviews your options from multiple lenders, some of which may not be directly accessible to consumers, and collects and manages all your paperwork. This can be especially valuable if you have a unique situation and are having trouble finding a loan to meet your needs, such as a renovation loan.
  • Their incentive to match you with a loan quickly, since they don’t get paid until you go to closing.

So, what’s the downside?

When you work with a broker, you don’t have the same visibility into the research and the transaction as you would if you were talking to the lender yourself.

In other words, the broker’s negotiating for you so you don’t know what they’re asking for … or what they’re not asking. You don’t really know what conversations they’re having with the lender, or where there may be hidden fees and costs.

A reputable broker will disclose upfront exactly what their fee is and how it will affect your mortgage interest rate (What is that, really? We explain.) and any fees you pay for your loan.

You can always shop around and compare an offer from your broker to offers from mortgage lenders you find on your own to confirm that you’re getting a fair deal.

Mortgage servicers

After you close on your home and pop the champagne, you’ll need to know where to send your monthly mortgage payments.

At closing, your lender will provide instructions on how to make payments. Once again, things can get a little confusing from there.

Payments may go to the same lender that you got your loan from, or to another company that you’ve never heard of. This is because your lender may sell the rights to “service” your loan to yet another party, a “servicer.”

Servicers specialize in the business of collecting payments on loans and sending them to the actual owner of the loan. The servicer takes a small amount of each monthly payment as its servicing fee.

Servicers are responsible for:

The important thing to know is that your servicer is the first place to call if you’re concerned about not making a payment. Your monthly mortgage statement will tell you who is servicing your loan and provide their contact info.

The mortgage journey is not always the most fun, but navigating it successfully is essential to owning and enjoying the home you want!

Shopping for a mortgage

Two words of advice: Shop around.

It’s tempting to take the first recommendation from a pro or loved one just to avoid the headache of researching it further, but there are many options out there and it can definitely pay to do some comparison shopping, especially when you are making the largest purchase of your life. After all, this is a six-figure loan that you may spend 30 years paying back.

We know: It’s fun to shop for homes! But choosing the right loan can make a big difference in your ability to enjoy the one you buy.

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