Often times our Landmark advisors are asked about the basics of the secondary mortgage market. It seems that Fannie Mae and Freddie Mac are always in the news. But what are they, and why do lenders "sell" them loans?
Mortgages, and specifically liens, are substantial sums of money that are tied up for up to 30 years. While depository institutions, which are chartered by both the Federal and State governments, have the capacity to lend large amounts of capital over long periods of time, mortgage banks don't. Keep in mind that a bank, in theory, can take the money it has in deposits, pool the money together, and lend it out to make home loans.
In order to maintain a sufficient pool of money such that they can continue making loans, mortgage banks such as Landmark, which do not take deposits companies but offer greater program and rate flexibility, "sell off" borrower's mortgages to another institution—often Fannie or Freddie, but also to pension funds, insurance companies, or securities dealers. Along with allowing mortgage banks to do more business, this practice earns mortgage bankers a commission on every loan they sell.
A mortgage has one of two paths it can follow once it enters the secondary market. It can be sold by a lender into one of Freddie, Fannie, or another financial institution's investment portfolios for cash, or it can be pooled with other mortgages in exchange for Mortgage-Backed Securities (MBS). MBS are very liquid investments that are traded on Wall Street through securities dealers, which means that lenders can easily hold or sell them. In turn, these transactions provide capital that can be loaned out to other borrowers.