Mortgage Money… Where Does It Come From?

We in the real estate industry are often asked the question, “Where does mortgage money come from?” This has changed a great deal over the last 30 years. In the “olden” days when someone wanted a home loan, they went into their local bank. If the bank had available funds, they would lend you the money directly and profit monthly from the interest differential. It doesn’t generally work like that anymore. Most of the money for home loans comes from three major institutions: Fannie Mae (FNMA – Federal National Mortgage Association), Freddie Mac (FHLMC – Federal Home Loan Mortgage Corporation) and Ginnie Mae (GNMA – Government National Mortgage Association).

After you apply for a loan with a lender, they do all of the processing and verifications and at the end of the process, your loan is funded and you make mortgage payments. You might be making payments to the company who originated your loan, or your loan might have been transferred to another institution.

The company you make your payments to very rarely owns your loan. They are the “servicer” of your mortgage. They are called the servicer because they are simply “servicing” your loan for the institution that does own it.

What happens behind the scenes is that your loan is packaged into a “pool” with a lot of other loans and sold off to one of the three institutions listed above. The servicer of your loan gets a monthly fee from the investor for processing payments and taking care of your loan. In fact, mortgage servicing is where banks and other lenders make the bulk of their profits.

Once your loan has been packaged into a pool and sold to Fannie Mae, Freddie Mac, or Ginnie Mae, the lender gets additional funds so they can make more loans (to service in their portfolio) and sell to those institutions, so they can get more money, and so on. This is the cycle that allows institutions to lend you money. We thought you might like to know!