The transaction

Writing a mortgage generates one-time fees for providing the lending or brokering service.

Interest charges

The holder of the mortgage charges interest based upon the terms of the mortgage.

Collecting payments

Because mortgages are commonly sold to investors, and most investors wish to collect interest on their money without having to collect payments from borrowers, mortgage servicing companies collect the payment on behalf of the investor for a fee.

As loans are funded by banks and mortgage banks, they are either held in the lender’s portfolio or they are packaged and sold in the secondary mortgage market. At this point, the mortgage begins to be pulled apart into its pieces – the lender retains the transaction income, sells the principal balance of your loan to another party who collects the interest, and sells the right ot collect the payments. By selling loans in the secondary market, lenders are able to replenish the funds necessary to originate additional mortgage loans.

The secondary mortgage market provides the great majority of funds that make mortgages possible. Mortgages sold in the secondary market are generally referred to as wither agency or nonagency loans.

Agency loans are those loans that are underwritten to standards created by the formerly government-sponsored – and now government-owned – entities such as Fannie Mae or Freddie Mac. These loans are also commonly called conforming loans, because they conform to agency standards. Conforming loans are sold by lenders to the agencies, who in turn pool the loans and offer them for sale to investors, either directly or through brokerage houses on Wall Street. Agencies play a vital role in the nations’ housing finance system by providing liquidity for lending operations in a variety of economic conditions.

While the housing meltdown led to a government takeover of these agencies, they


Have always been quasi-government entities. This is because the government steps in, when necessary, to ensure adequate liquidity exists in the financial system to fund mortgage loans. These agencies will likely continue to exist, in one form or another, as the economy takes shape in the years to come.

Nonagency loans are simply loans that do not conform to agency standards. These loans are made to underwriting standards that are acceptable to an investor, or are appropriate for the loan portfolio of a lending institution, such as a bank. The most commonly recognized nonagency loan is the jumbo loan, which is larger than the maximum loan size an agency will accept. In recent years, the most famous (or infamous) type of nonagency loan has been the subprime loan. Nonagency loans are most often sold to investors via brokerage houses on Wall Street. Examples of these types of loans are stated-income loans, option ARMs (or pick-a-pay loans), and a variety of other loan products that no longer exist and – as you will discover if you haven’t already – were the seeds that gave rise to the foreclosure harvest.

The range of nonagency mortgage products available at any time is dependent upon general economic conditions, the health of the housing market, and the appetite of investors for instruments that are backed by mortgages. Beginning in 2007, degradation in each of these factors gave rise to an ever-shrinking pool of funds available to write mortgages. As the housing crisis continued to form, the liquidity continued to tighten. This tightening is a natural part of the economic cycle.

Investors of agency and nonagency loans include, but are not limited to, insurance companies, pension funds, commercial banks, fund managers, foreign banks, and other financial institutions.

In summary, consumers deal with intermediaries, such as brothers, or directly with lenders, who sell their loans to agencies or Wall Street – who in turn package the loans for sale to investors.

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