After going through the stress of working with a lender to get your first home mortgage, you might wonder why you have received a letter telling you the mortgage has been sold and you must now send your payments somewhere else. In the world of mortgage financing, new home loans typically go into a secondary market where the loans are packaged up and sold to investors. In most cases, the lender that gave you your home loan will sell off the loan.
The Funding of Mortgages
Most mortgage lenders do not have the capital or want to tie up capital by making mortgage loans and keeping the loans on their books. The mortgage business has evolved into using outside money to fund new mortgages. Your home mortgage lender makes loans primarily to earn fees from originating the mortgages. Soon after your loan is finalized, it gets sold into the secondary market and then the amount of the loan balance will be used to make another home loan.
The government sponsored agencies of the Federal National Mortgage Association -- Fannie Mae, Federal Home Loan Mortgage Corporation -- Freddie Mac, and the Government National Mortgage Association -- Ginnie Mae, are the primary players in the secondary mortgage market. Fannie and Freddie set the standards for a "conforming" mortgage, providing uniformity to buyers in the secondary market. Ginnie Mae gives a government guarantee to buyers of FHA and VA insured mortgages. A small portion of the mortgage market consists of mortgages that do not fit the criteria of Fannie, Freddie and Ginnie. These loans are bought and securitized in a separate section of the secondary mortgage market.
Fannie and Freddie buy up mortgages that meet the agencies' criteria and then package up groups of loans -- often called mortgage pools -- and sell mortgage-backed securities, which are bonds that generate interest and principal payments from a specific pool of loans. Ginnie Mae does not directly issue these securities; instead the agency guarantees the loans packaged by third-party financial institutions. Non-agency guaranteed mortgages can also be resold as mortgage-backed securities, but without the implied U.S. government backing of the agency bonds. Mortgage-backed securities of all types are purchased by investors looking for bond interest income.
The mortgage servicer is the company to whom you send your monthly payments. This company handles the management of your mortgage, including your escrow balance, paying insurance and property taxes, and sending the principal and interest portion of your payment to the appropriate mortgage pool. The mortgage-servicing rights of your loan are a separate asset and can also be sold to another company. So if the company you send your check to changes several times over the course of your mortgage, you know the servicing rights have been sold.
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