$5k to the mortgage banker, effectively buying the entire loan.Mortgage banker makes money from fees, gain on sales, and by servicing the loan.Servicing the loan is that they collect the money from the Consumer. The whole secondarymarket is invisible to the consumer. In most loans, you make a payment called an EscrowPayment, 1/12th of real estate taxes that you own on the property and 1/12th of theinsurance premiums to the Mortgage Banker. Holds this money until taxes and insuranceare due. For doing all this, the Mortgage Banker has to make sure the Consumer pays. If they don't pay, the Mortgage Banker is responsible for suing the Consumer for nonpayment.Typical remedy is
foreclosure
to take title to the house for resale, to pay off the loan. Themortgage bank doesn't own the loan anymore! They are just servicing!
Servicing
is theprocess that the mortgage banker is responsible for collecting and distributing payments.They get a fee called a
Service Fee
, calculated on an annual basis. It's a percentage of theprinciple amount of the loan. Generally computed in
Basis Points
. 1/100th of a percent.0.01%. 100 basis points = 1%. The typical servicing fee is 25 basis point. 1/4 of 1% for theentire loan. $100k loan, is $250 a year. So that makes it more profitable to have as manyloans as possible.The Consumer is making the payments to the mortgage banker.Where do the Secondary Market Players get the money? They take these loans that theyhold, massage and twist them and turn them, and bundle them. They then sell them on the
Capital Market
. Pensions, hedge funds, anyone that has to invest large sums of money arethe ULTIMATE PROVIDERS of the funds. Mortgage rates that the consumer gets are for themost part what the investors in the capital markets are willing to buy, and what interestrates are attracted to them. Interest rates flow backwards. The amount of outstandingmortgage loans is over $11 trillion. There is no other part of the economy that there is thislevel. So if something goes haywire in the system, on the very macro level, how it caneffect everything else. THERE IS SO MUCH FRIGGING MONEY INVOLVED.----
Conventional loan
is NOT a government loan.
Government Loan:
two principle types.
FHA insured loan
. It's a loan that you pay an insurance premium to the government,and the government insures the lender that they will get their money even if youdefault. Lets lenders lend to people they otherwise would be skittish of lending to.
VA Guaranteed Loan:
guaranteed to a veteran and his family. Similar to FHA, but adifferent guarantee. Makes it easy for them to get loans.
Conforming Loan:
essentially a loan that conforms to the requirements of Fannie Mae andFreddie Mac. If they will buy it, it is deemed to be a conforming loan. Whether or not it is aconforming loan has a LARGE impact on how the capital market will react. In general, aconforming loan is one that is no greater than $417k. Conforms to the underwritingrequirements. The credit of the underlying consumer has to be good enough. This is calledcredit underlay. Also a property underlay. Have to meet all three to be conforming.
Jumbo Loan:
a loan that is greater than $417k. Historically, with good credit, Jumbo Loanshave been 1/4% higher than conforming loans. More recently, they have been 1% higherthan conforming loans.
Subprime Loan:
A loan made to an individual with credit difficulties. For some purposesdefined in relationship to a person's credit score. Significantly higher interest rates.----2
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