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Making Your Way Through the Mortgage Jungle

Updated: Feb 10, 2020

The real estate industry is inseparably linked to the mortgage industry. Some people purchase and develop real estate properties using their own cash; however, the great majority of real estate purchasers and developers require mortgages to finance their acquisitions and development. In this article, I will summarize some basic terms and concepts regarding mortgage lending and the financial institutions that provide mortgage loans.

What is a mortgage? A mortgage is a written instrument that is recorded in the public records to secure repayment of a loan to purchase or develop real estate or which is secured by real estate. When we talk about mortgage lending, we often hear about the primary mortgage market and the secondary mortgage market. The primary mortgage market simply refers the market in which lenders make mortgage loans directly to borrowers. The lender and borrower work together to negotiate the loan terms and complete the mortgage transaction. In the primary market, the process includes originating, processing, underwriting, closing and funding a mortgage loan. The primary mortgage market is comprised of various lending institutions, such as commercial banks, S&Ls, Credit Unions, mutual savings banks, mortgage bankers, and mortgage brokers.

The secondary mortgage market refers to the market in which private investors and government entities buy and sell real estate mortgage loans that have been originated in the primary market. Private investors are a small section of the secondary market, which can include Wall Street funds, investment brokers, high-risk investors, insurance companies, pension plans, etc. There are also investment vehicles in which multiple mortgage loans are pooled together and investors acquire an undivided interest in all of the mortgages to help reduce their risks. The vast majority of the secondary market, however, is through the Federal National Mortgage Association (FNMA/ Fannie Mae), Government National Mortgage Association (GNMA/Ginnie Mae), and Federal Home Loan Mortgage Corporation (FHLMC/ Freddie Mac).

In 1913, the Federal Reserve Act created the Federal Reserve System. This Act established a federal charter for banks that permitted them to make real estate loans. The Federal Reserve Act implement a system for the government to influence the interest rates that are paid on bank deposits and charged on mortgage loans.

In 1938, Congress chartered Federal National Mortgage Association (FNMA/Fannie Mae) as a government sponsored enterprise to provide liquidity and stability to the U.S housing and mortgage markets. Fannie Mae is the largest investor in residential mortgages in the USA, and originally functioned as a place for lenders to sell their FHA insured loans. Fannie Mae buys conventional, FHA and VA mortgages that conform to its standards and converts these mortgages into mortgage-backed securities for which it guarantees timely payment of principal and interest. In 1968, Fannie Mae converted into a private shareholder-owned company, and in 2008 it was placed under the Federal Housing Finance Agency. The Federal Housing Finance Agency was created by the Federal Housing Finance Regulatory Reform Act of 2008 to protect and promote a stronger and safer U.S housing finance system.

The Government National Mortgage Association (GNMA/ Ginnie Mae) was created in 1968 as a government-owned corporation, operated under Department of Housing and Urban Development. Ginnie Mae promotes investments in mortgages by guaranteeing the payment of principal and interest on FHA and VA loans. If the borrower does not make their mortgage payments, investors will receive payment from Ginnie Mae. Ginnie Mae’s mortgage-backed securities are the only ones that carry the full faith and credit guarantee of the United States government.

The Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac) was chartered in 1970 as a nonprofit institution under the Federal Home Loan Bank System. Like Fannie Mae, Freddie Mac buys mortgages on the secondary market, packages them and sells them as mortgage-backed securities to investors on the open market. Freddie Mac also converted into a privately owned stock corporation and was placed under conservatorship of the Federal Housing Finance Agency in 2008. The main difference between Fannie Mae and Freddie Mac is that Fannie Mae buys mortgage loans from larger commercial banks while Freddie Mac mostly buys loans made by smaller banks.

In addition to the Federal Reserve, oversight of the mortgage industry is also provided by the following agencies:

The Federal Deposit Insurance Corporation (FDIC) is a public corporation established by Congress in 1933 to regulate banks and insure bank deposits. The FDIC insures deposits in commercial banks and S&Ls up to a maximum of $250,000 for each separate depositor in each bank. The FDIC directly examines and supervises more than half of the banks and saving banks in the banking system for operational safety and soundness. Banks can be chartered by the states or by the federal government. Banks chartered by states have a choice on whether to join the Federal Reserve System. The FDIC primarily regulates the banks that are chartered by states and do not join the Federal Reserve System. In addition, the FDIC supervises the remaining insured banks and thrift institutions.

The Office of Comptroller of Currency (OCC) charters, regulates and supervises all national banks and federal branches/agencies of foreign banks. It is headed by the Comptroller, who is appointed by the President and is also the Director of the FDIC.

The National Credit Union Administration (NCUA) is the independent federal agency that charters and supervises Federal credit unions. The NCUA is backed by the full faith and credit a of the U.S. government and operates the National Credit Union Share Insurance Fund (NCUSIF) to insure deposits in Federal credit unions.

The Federal Financial Institutions Examination Council (FFIEC) makes recommendations to promote uniformity in the supervision of financial institutions. FFIEC prescribes uniform principles, standards, and report forms for the Federal examination of financial institutions by the Board of Governors of the Federal Reserve System (FRB), the FDIC, the NCUA, the OCC, and the office of the Thrift Supervision (OTS).

Mortgage lending is a highly regulated industry with multiple Federal agencies involved in regulating and guaranteeing mortgage loans and bank deposits. Diligence, accuracy and knowledge are required to successfully navigate the process of obtaining or investing in a mortgage loan. The goal of this article is to provide you a brief overview of mortgage lending institutions and help you grasp the basic concepts of primary and secondary mortgage markets.

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