Home loans: How do they Work
The ways loans are made have changed through time. Before, when you want to make a loan, you go to the nearest bank in your area and then ask for it. Since they probably know you and consider you a good borrower, they will probably give you a loan as long as they have extra cash lying around.
Now, the process is longer and more tedious, and home loans are harder to obtain. Why is this case? Because nowadays home loans have become more centralized, and here are three major financing institutions that own and lend mortgages: FNMA - Federal National Mortgage Association, FHLMC - Federal Home Loan Mortgage Corporation, GNMA - Government National Mortgage Association.
These three industry giants do not give you the service; they provide the money that you borrow. So you can talk to any lender, get an approval, move into your home, and start repaying your mortgage without really meeting who you borrowed from. Most of the time, the company where you applied for your home loan does not own your loan.
Chances are, when you start repaying your mortgage, you are paying to any of the three big lenders mentioned above, or your loan might have been moved to a different middleman.
All of these things that we have discussed are the natural order of things. Your home loan will be part of a bigger group of home loans, and this group will be purchased by FNMA, FHLMC, or GNMA. Doe these three sound familiar? They are also known as Fannie Mae, Freddie Mac, and Ginni Mae respectively. The company you borrowed from charges a monthly fee for the processing of your loans and repayments.
This is not to say that the consumers are getting a bad deal since it seems charges could have been doubling because of middleman fees but that is rarely the case. The three lenders give a minimal percentage to the service providers, they do not add to the overall loan agreement. The service providers therefore make sure they sell home mortgages by bulk in order for them to get a pretty neat sum of profit.
The mortgage servicing lenders can also use the loans to benefit their portfolio, to make it look better, giving them the leverage to loan more money. The whole system of originating mortgages and such is a plot to get more loans into their portfolio, to make it look as if they have enough loan repayment schedules to be a profitable business. However, more often than not, the loans are insufficient to even reach break even.
That is the reason why they need to be service providers, so they could have more money. Think of it this way, a lending company gets about 50 mortgages reeled in, and then they sell off these mortgages to Fannie Mae, Freddie Mac, or Ginnie Mae. After which they get a percentage from the sell off, plus service fees for taking care of the loans. Whatever they get from the sell off and the percentage fees are now used to rollover new loans, trying to get another batch to sell off. It’s just a cycle after that.
Tags: Home loans, How do they Work