“There must be plenty of money in the bank account because I still have plenty of checks in the checkbook.” Sounds like someone headed for a financial disaster, does it not? This consumer will certainly discover a disastrous truth unless someone continues to deposit more money into the bank account. The consumer in this illustration is a good example of the fate of mortgage companies if they continued to fund mortgages with no infusion of financial lump sums along the way to continue the process.
Mortgage companies fund millions of dollars in mortgage loan funds but receive small payments per month over several years on each loan. At regular intervals mortgage companies need lump sum deposits from somewhere to continue funding more mortgages each month. That “somewhere” from whence cash cometh is usually a government sponsored enterprise such as Fannie Mae or Freddie Mac, also called the “secondary market.” Once a mortgage is originated the lender can either hold the mortgage in their own portfolio or they can sell the mortgages to secondary market investors like Fannie or Freddie and replenish their funds in order to lend to more homebuyers.
What does the secondary market mean to those working in the real estate industry? Research has shown that mortgage interest rates would be one-half of a percentage point higher if the mortgage was sold to private investors instead of Fannie or Freddie. Lower rates mean more homebuyers and reduced operating costs on rental property.
Fannie and Freddie stabilize the mortgage flows by making credit readily available in communities across the country at about the same interest rate and under the same underwriting guidelines. Before the development of the secondary market, housing markets were at the mercy of regional disparities.
Borrowers can choose from a wider selection of loan products. In America borrowers can choose from fixed rate 30, 25, 20, 15 or 10 year terms, a myriad of adjustable products, interest only products and combinations of loan programs. A significant number of homebuyers may have decided to buy a house or rental property because of the financial terms available that they otherwise would not have purchased.
Fannie and Freddie continue to roll out innovations such as automated underwriting systems that streamline the lending process, producing quicker loan approvals, reducing mortgage rates, and expanding the market to new borrowers. Faster loan approvals translate to a larger number of real estate closings. Higher velocity equals more real estate closings and more commissions for real estate professionals involved with those transactions.
When Fannie and Freddie need an influx of cash, they package mortgage loans into pools and sell mortgage- backed securities which show up in retirement funds, mutual funds and other places. Fannie and Freddie not only affect the real estate professional in day-to-day real estate sales, but also in the professional’s personal investment portfolio.
J. Garner, Mortgage Officer
Evolve Bank & Trust