Where Does Mortgage Money Come From?

Jul 12
Category | General

Where Does Mortgage Money Come From?

We want to dispel the myth that Greenway Mortgage has a giant vault in the back of our office where we get stacks of hundred dollar bills to fund loans. If that were the case, our team would have retired years ago.

So where does mortgage money come from? Well, when you go to closing, the money that goes to the settlement agent comes from Greenway Mortgage. The settlement agent disperses funds to the proper recipients, such as the seller, the realtor and the attorney.

But where does Greenway get its money from? We get our money from a warehouse bank. We close loans in our name with our warehouse line, which is basically a giant credit card. We use this warehouse line to send money to the settlement agent.

Keep in mind that this is how a correspondent banker operates. Greenway Mortgage is a correspondent lender, not a broker or a bank. Other lenders may operate in a slightly different fashion.

An investor, often one of the large, national banks, will then come in and purchase the loan off of the warehouse line. We transfer the mortgage and servicing rights to this investor. They replenish the money on the warehouse line and become the servicer of the loan, collecting monthly payments from the borrower.

The investor will then package the mortgage with loans of similar quality – similar loan-to-value, credit profiles, etc. – and sell the package to a government-sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac. The GSE will then sell the package as a mortgage-backed security to the open market. Every time you make a mortgage payment, a portion of that payment goes to the entities involved in that transaction.

That’s how GSEs work. Government agency loans, such as FHA, VA and USDA loans, operate similarly to GSE loans, except that government agency loans are insured. For example, when a borrower closes an FHA loan, they pay upfront and monthly mortgage insurance premiums that insure against default.

Government agency mortgages are securitized in the same way as conventional loans through Ginnie Mae. However, the fact that these loans are insured gives them greater residual value. Depending on how they are grouped in mortgage-backed securities, the value of the mortgage-backed securities will be impacted.

Another category of selling loans into the market is private securitization. These loans typically have similar characters of non-government loans that are securitized with Fannie Mae or Freddie Mac, except that they do not qualify for one reason or another. Usually, this is due to the loan amount, which is above the specified limit of the conforming GSEs. These loans are classified as non-conforming loans or “jumbos loans.” These loans are sold to banks, which then sell them to the open market in the same manner as a government-backed GSE would.

The final category is portfolios. When a loan doesn’t fit into the GSE, private securitization or government agency categories, it goes into a portfolio product. A portfolio product can be offered by community banks, private investor banks, and large, national banks. In this case, the loan isn’t sold into the secondary market as an investment vehicle. The bank holds and services the loan and collects the interest.

Some people are surprised to find out that loans are bought and sold, but this practice is actually a very good thing. It creates liquidity in the market that allows more loans to be made and contributes to lower interest rates. Otherwise, there would be fewer loans available and rates would be much higher.

Another important thing to keep in mind is that Greenway Mortgage Funding Corp will always be available as your point of contact for the life of the loan. If you have a question, you can call us. Also, the terms of your loan will never change, regardless of what happens behind the scenes.

We’re sharing this information because we believe in total transparency about every facet of the mortgage process. When choosing a mortgage lender, we encourage you to ask questions and learn as much about the mortgage process as possible. Remember, there is no such thing as too much education.


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