Generally how a company deals with their loan product would be decided at a meeting of the Principals in the formation of the company policies.
After making a loan, a lender can:
- hold the loan and bear the risks until the entire debt is repaid.
- warehouse it, using it as collateral for loans it needs from other lenders.
- sell it to another lender or investor.
- use it to back securities sold to investors.
These activities are said to occur in the secondary mortgage market. The secondary mortgage market is where mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities and sold on the equity market. It is comprised of investors and lenders that buy and sell real estate mortgages from primary market lenders.
Major participants in the secondary mortgage market are three agencies created by Congress:
A) Federal National Mortgage Association (FNMA) Fannie Mae, created in 1938
B) Federal Home Loan Mortgage Corporation (FHLMC) Freddie Mac, created in 1970
C) Government National Mortgage Association (GNMA) Ginnie Mae, created in 1968
None of these entities make loans directly to homebuyers or have any direct contact with the public. Instead, their function is to provide a source of funds for lenders in the primary mortgage market by buying and selling mortgage loans and offering securities backed by these loans. The issuance of these securities, representing interests in pools of mortgages, is termed securitization.
FREDDIE MAC AND FANNIE MAE
Freddie Mac and Fannie Mae are the largest entities in the secondary mortgage market. Both will buy conforming conventional loans, Federal Housing Administration (FHA)- insured loans, Department of Veterans Affairs (VA)-guaranteed loans and U.S. Department of Agriculture (USDA)-guaranteed loans. Fannie Mae also buys commercial (e.g., apartment building) loans.
These entities have reduced the need for lenders to hold substantial funds for mortgage loans. They have simplified and expedited the mortgage loan process by developing standardized loan forms they have also developed loan and borrower qualification criteria that make mortgage loans available to greater numbers of prime credit borrowers. Until the middle of 2008, when they were taken over by the government, both were considered government-sponsored enterprises (GSEs), as they were created by Congress and received government assistance, but were only quasi-governmental entities. Currently, they are attempting to work through extreme financial difficulties with tighter controls and innovations that may help them return to financial stability.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
The Government National Mortgage Association, also known as Ginnie Mae (GNMA), is a government corporation within the U.S. Department of Housing and Urban Development (HUD). Its purpose is to increase the supply of credit available for housing by directing funds from the securities market into the mortgage market. It does this by guaranteeing, with the full faith and credit of the United States government, mortgage backed securities composed of mortgage loans insured by the FHA or guaranteed by the VA or the USDA that are issued by private lenders.