Your Home Mortgage. How unseen investors generate funds to keep home loans flowing
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In 1983, Freddie Mac introduced another security, the collateralized mortgage obligation, or CMO, to give investors a choice of short, medium, or long maturities. Investors in CMOs get a payment every six months. Unlike Fannie Mae, Freddie Mac does not keep many of its mortgage securities in its portfolio. Since 1970, it has purchased more than $130 billion in mortgages and sold $115 billion in mortgage securities.Skip to next paragraph
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In the last few years, these quasi-governmental agencies have been joined in the mortgage-backed security business by several private companies, including Shearson Lehman Brothers; Sears, Roebuck; Prudential; and Merrill Lynch. Who are the investors? IN addition to individuals, the list of investors in mortgage-backed securities includes pension funds, insurance companies, state housing-finance agencies, and the very same banks and thrifts (S&Ls) that sold those mortgages in the first place. While a banker likes to have the security and income benefits of home mortgages, he or she would rather have someone else bear the risks of early prepayment, interest rate fluctuations, and possible delinquency. So a bank may invest in securities at least partly backed by the same mortgages it wrote a few weeks or months before.
After a group of home loans is packaged and sold to investors on the secondary market, the original lender is responsible for collecting the monthly payments, keeping escrow accounts to pay the homeowner's house insurance premiums and property taxes, and -- through the agencies or companies that issued the securities -- paying the investors.
This is called ``servicing'' the loans, and it provides the bank, thrift, or mortgage company with a small annual fee -- often less than $400 per loan. But with enough loans, it can be a lucrative business.
For example, Dallas-based Lomas & Nettleton, the largest mortgage banker in the country, services more than 700,000 mortgages, says John W. Heamon, a private consultant to mortgage companies.
Those in the business, however, argue that the people who buy the houses also benefit.
``The main beneficiary of the secondary market is the home buyer,'' says Alfred A. Tegel, a vice-president at Cardinal Federal Savings in Cleveland. ``The market provides a wider source of capital and, hopefully, interest rates will not be as volatile.'' TRANSLATING THE LENDERS' LINGO
Where does the money in that fat check you get to hold for a few minutes come from? And where does it go? Here are definitions of some of the terms people in the mortgage business like to throw around:
Secondary market. Where lenders get more money for home mortgages, either by selling pools of mortgages made in the past or by obtaining agreements from investors to purchase mortgages written in the future.
Mortgage originators. Including savings-and-loans, commercial banks, mutual savings banks, mortgage companies, and credit unions.
Conduit. A bank or other institution that buys mortgages and packages them to sell to other investors.
Investors. Including thrift institutions, banks (for their own portfolios and their trust accounts), pension funds, life insurance companies, and private individuals.
GNMAs. Ginnie Maes: pass-through securities, passing homeowners' mortgage payments to investors. They are guaranteed by the Government National Mortgage Association and represent ownership of FHA or VA loans.
PCs. Mortgage participation certificates: pass-through securities guaranteed by the Federal Home Loan Mortgage Corporation. PCs represent interest in conventional (not government-guaranteed) and FHA and VA mortgages.
MBSs. Mortgage-backed securities: about the same as PCs but guaranteed by the Federal National Mortgage Association.
CMOs. Collateralized mortgage obligations, secured by conventional mortgages and issued in bondlike securities with short, intermediate, and long-term maturities.
Warehousing. Whereby lenders borrow capital from other lenders and investors so they have enough money on hand for new loans. The term is also used to describe what a lender does with mortgages until it can sell them on the secondary market; it keeps them in its own portfolio until then.