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So Whose Money Is the Bank Lending if it is Not Their Own?

Banks want borrowers to believe that they are the ones loaning you the money... But most bankers simply process the paper work, and than sell the note.

Where Does All The Money Come From For Home Loans?
Introducing Fannie Mae, Ginnie Mae and Freddie Mac

It is surprising how many borrowers ask us about who is actually loaning them the money they are applying to borrow for their home loan... some seem to think it might belong to the mortgage banker or broker. In the case of some "Hard Money Loans this might be the case, and if such it would clearly be disclosed; but most loans are not "Hard Money."

So the question remains; Where Does All The Money Come From For Home Loans? This can all become pretty boring reading, but the Federal National Mortgage Association (FNMA or Fannie Mae), Government National Mortgage Association (GNMA or Ginnie Mae) and Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) are all "secondary market lenders". Typically retail lenders receive the funds they loan from a “Secondary Market Lender.”
 
It is these “Secondary Lenders” that assist the national mortgage markets by allowing money to move easily from state-to-state. The movement of these “Secondary Funds” helps to avoid a situation where mortgages are only available in certain "more popular" areas or states. It is these secondary lenders who work on establishing the basic regulations and guidelines under which the funds may be lent out, and in doing so help the general public by stimulating home purchases in areas that might not otherwise be able to find funds for home lending. For example, the secondary market will not recycle a loan from a commercial lender unless the new homeowner meets specific “financial qualifications,” which is where “Conforming Loan Guidelines” come into play.

Federal National Mortgage Association (FNMA or Fannie Mae), Government National Mortgage Association (GNMA or Ginnie Mae) and Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), or as they are more commonly referred to, GNMA, FNMA, and FHLMC all buy mortgages from these secondary financial institutions that help make loans, and then they group the individual mortgages into larger “pools” of loans. They then sell unit shares in these pools to investors similar to other stocks and bond offered on wall street.

For example, suppose you buy a house or apartment building, and you take out a mortgage loan in the process. The term of the loan may vary from 15, 20, 30, 40 or now even 50 years, and the interest rate may be fixed, adjustable or some combination there of. A government mortgage agency then may buy your mortgage from your lender or bank and combine it with other mortgages to create a “pool;” typically of $1 million dollars or more. The agency then may issue bonds on these pools through financial other institutions, marketing them through brokers. This is how the typical "Money Cycle" works, using the bonds issued to raise additional capital so the agency can replenish their financial resources, as well as to buy and support additional mortgages.

Although this is a somewhat simplified explanation if you factor in "Non-Conforming" loans and "Portfolio Lending," it explains where over 95% of all home loan funding comes from, and in most instances is where those lending programs ultimately receive their funding from also.
Full Copyright 2007 Ed Wright, and/or submitting content provider(s); All Rights Reserved