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When you think of investments, where does your mind go? Stocks and bonds? Gold and silver? Maybe your brain jumps to the 1,000+ cryptocurrencies that now exist.
Do mortgages come to mind? If you consider a mortgage as just another type of financial instrument, it makes sense home loans could be something to invest in.
What is a Mortgage Investor?
A mortgage investor is exactly what you think…someone or something that invests in home loans. It’s a third party that purchases mortgages and/or their servicing right from lenders like banks and credit unions.
The investor capitalizes on the underlying principal and interest payments, or packages other similar home loans together to create a mortgage-backed security. It then sells this new bond-like investment to other investors.
>> More: How the Federal Reserve Affects Mortgage Rates
Three Main Mortgage Investors
The primary types of mortgage investors are directly or indirectly sponsored by the U.S. government but there are private investors like corporations and individuals as well.
Given the complexity of mortgage-backed securities, however, individual investment is minimal and is reserved for especially sophisticated investors.
The Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) do not lend money directly to consumers, but these government-sponsored entities purchase millions worth of mortgages to package into bonds and sell to investors.
You likely know these agencies as Freddie Mac and Fannie Mae, respectively. They are the biggest investors in mortgage-backed securities, but only purchase conventional home loans backed by private financial institutions.
These would include your typical fixed-rated30-year term mortgages.
The older sister of Freddie and Fannie, Ginnie Mae, or the Government National Mortgage Association (GNMA), doesn’t purchase, package, or sell home loans, but instead provides a guarantee of monthly payments to investors for bonds created by government home loans.
These include mortgages under the VA, the FHA, and the USDA. Each of these government agencies sets guidelines for the lenders they purchase from as well as the investors they sell to.
These particular mortgage-backed securities are backed by the full faith and credit of the U.S. government.
Insurance companies, hedge funds and mutual funds are all charged with protecting and growing their client’s investments.
Privately sponsored mortgage-backed securities carry higher risk than if they were sponsored by the government.
Although, mortgage-backed securities, which closely resemble bonds, are considered a safer investment because above all else people generally do whatever it takes to keep their homes.
How Mortgage Investing Works
In the complicated world of investing, sometimes an example is the best way to learn. Here’s how mortgage investing works:
1. A mortgage originates with a bank or other financial institution.
2. That lender either sells the mortgage or keeps it in its own portfolio to make money off interest payments and other fees. Note: All banks and credit unions keep a certain percentage of their own issued mortgages.
3. If not retained, the home loan is sold to an investor who in turn keeps the mortgage or packages it with home loans of similar characteristics such as applicant credit score or loan amount. Loans are also bundled by their risk profiles.
4. These pooled loans create a mortgage-backed security.
5. Investors purchase the mortgage-backed security and then make their money off the monthly payments homeowners make to their loan servicer.
Why was my Mortgage Sold?
Chances are your mortgage was sold right after you closed on it, you just may not have known.
Mortgage originators sell home loans or their servicing rights to investors to create more capital to fund more mortgages.
In fact, the existence of the secondary mortgage market where mortgages are bought and sold, is especially important in keeping funding free flowing in the real estate finance market.
Banks previously were unable to fill very many loans at a time and could only service smaller amounts and smaller terms.
By being able to offload their mortgages and the associated risks with keeping them, they can service more home loans with more competitive terms and rates for more consumers.
>> More: How Are Mortgage Rates Determined?
Will my Mortgage Change if it is Sold?
Fundamentally, your mortgage won’t change in any way if it’s sold. Your interest rate, term and other agreements remain the same.
What does change is who or what is receiving your uniform monthly mortgage payments once the books have settled.
You can determine if you mortgage can be sold by checking the fine print on your loan paperwork. If your lender has sold it, they are required to inform you within 30 days.
Bottom Line: What is a Mortgage Investor?
A mortgage investor is an important player in stabilizing national mortgage rates, and so they affect your loan most when you’re first trying to acquire it.
Investor’s appetite for home and other real estate loans drives bond yields up or down, which has a direct effect on the interest rates normal consumers like you see.
This cyclical relationship keeps financing in the housing market flowing and gives more people the opportunity to get a mortgage.
There’s no need to worry if you find out your mortgage has been sold—it may happen multiple times during its term. In most cases, your loan servicer remains the same and you’ll never notice the difference.
If your servicer does change, where you send your monthly payments will likely be the only thing affected.
Be sure to contact your mortgage lender specifically if you have questions and always take time to read the fine print so you’re more informed.