We like to think that we’ve made the home loan process so simple that you could easily get a mortgage and make payments on it for 30 years without having much of a clue as to where the money came from, how the interest rate was set and other inner-workings of the system that makes it possible for thousands of Americans to buy homes every year. With all the recent tumult in the lending industry, however, you have good reason to want to be informed about what’s going on inside the magic mortgage market machine. So we’ve arranged a peek behind the curtain at who is pulling the levers. Here are 7 key players in the mortgage market:
1. Mortgage lenders
Used to be you’d go down to your local bank office to discuss borrowing with a loan officer. Now, while banks are still big mortgage lenders, there are a slew of other firms whose only business is making loans. A mortgage broker can help you select the best loan offer for you from among the wide variety of lenders.
2. Fannie Mae
The Federal National Mortgage Association was formed in 1938 to provide banks with federal money so they could make home loans during the Great Depression. In 1968, it was privatized, but as a government-sponsored enterprise (GSE). Fannie Mae was taken over by the Federal Government in September 2008.
3. Freddie Mac
Another GSE that was recently taken over by the Federal Government, the Federal Home Mortgage Corporation was formed by the federal government in 1970 so that Fannie Mae did not hold a monopoly on the secondary mortgage market, in which Fannie and Freddie buy mortgage obligations from primary mortgage lenders (see #1). Together, Fannie and Freddie own more than half the U.S. mortgage debt.
4. Investment banks
Along with Fannie and Freddie, investment banks are major buyers in the secondary mortgage market. Mortgage lenders use the cash they get from selling mortgages to make more mortgages.
5. Investors
Fannie, Freddie and investment banks bundle the mortgages they buy into “mortgage-backed securities,” which are then sold to investors, who profit from the payments that borrowers make on the mortgages in the bundle. How much investors are willing to bid for mortgage-backed securities influences interest rates as well as the availability of home loans.
6. Federal Reserve
The Federal Reserve also influences the mortgage market because it sets the discount rate, or the amount banks charge one other for overnight loans. The discount rate plays an indirect role in determining mortgage rates.
7. U.S. Treasury
The Treasury Department supports Fannie Mae and Freddie Mac by making a line of credit available to them. In recent weeks, Treasury officials have taken the unprecedented step of bringing Fannie and Freddie under federal control, after weakness in the housing and mortgage markets threatened to sink the two mortgage giants.
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