Home Mortgages - Whose Money Is It Anyway?

Once lent, the money used to purchase the bond works through that system to allow the Note and Mortgage at the closing to be signed.

The average person does not realize that as much as 90% of the funding used to finance mortgages is obtained through the sale of a unique bond which uses mortgages as collateral.

Therefore, if someone takes a mortgage on their house, then the true investor in the loan is not the bank loaning the money, but the individual or institution who bought the MBS.

The gist of a mortgage transaction is that a mortgage ends up being funded by someone or an institution that purchases a bond on Wall Street.

The reason that banks sell the mortgages to be used as collateral for bonds is because they need to replenish their reserves of money allocated to lend such mortgages. Banks need a constant flow of money coming in to finance their mortgage business and going out as the actual loans.

Most mortgages are sold to two giant financial entities: Fannie Mae and Freddie Mac.

Fannie Mae is a financial services company that offers banks and other mortgage lenders financing, credit, guarantees, technology and services so lenders can make more home loans to consumers.

Freddie Mac is a financial services company chartered by Congress to provide a continuous and low cost source of credit to finance America's housing.

Traditionally, Fannie Mae and Freddie Mac mortgages have always been investments with diminished risk because of stringent guidelines issued by these entities to insure that their purchased mortgages are sound.

Think about it this way - if you invested $250,000 into an investment to one person, and that person could take as long as 30 years to pay back the money, and they only were going to pay you 6%, you would probably want that borrower to be rock solid, wouldn't you. That is why it can seem like pulling teeth to qualify for the best rates sometimes.

Since Freddie and Fannie buy the majority of mortgages, which in turned are used to back mortgage securities, these entities dictate the underwriting guidelines for just about all of the mortgage industry. To insure that the mortgages backing MBS are sound, both these institutions require certain documentation, to ensure that the bond is a safe investment.

Thus, most loan programs are premised on Fannie Mae or Freddie Mac lending guidelines and the best mortgage rates on loans are the ones that you can sell to Fannie Mae and Freddie Mac.

It is a fair to state that everyone in the mortgage business answers not only Fannie or Freddie, but also the owners of mortgage bonds - from the person borrowing the money to the banks and large institutions lending the banks the money.

When you attend a closing, you sign many papers that are called "Disclosures," most required by financial institutions and regulators to disclose to borrowers their rights in the transaction and what actions may be taken by the lender in regard to their loan after the mortgage papers are signed.

One such disclosure informs the borrower that the "loan servicing" may be transferred from the original lender and that they are entitled to written notice of such an action within 30 days of the transfer.

The form also informs you what percentages of loan servicing of mortgages have actually been transferred, year by year, for the last three years by the bank offering the loan.

If the percentages are great, what is likely is that the mortgage a borrower is signing is already sold and that they will be writing their check to another bank, institution or person in the future.

After the closing, when a person receives notice that they are to pay another company their monthly payment, then the mortgage company or bank has surely sold the servicing on that loan. Not to worry, though - regardless of who is servicing the loan, the terms remain the same.