Tuesday, April 16, 2013
Who Owns Your Debt
Who Owns Your Debt
Blog Post 2
By: Alvaro Villegas
When people hear mortgage, they quickly link the term to banks. Among those who are paying a mortgage or have done so in the past, there are a great deal of individuals who aren’t aware past the bill they send. After acquiring a debt for 30 years, one should have an understanding of who made their home purchase possible.
Traditionally Lenders obtain funds lendable for mortgages through deposits. This method however restricts banks with lendable assets, and therefore become unable to lend money beyond their funds. For this reason, the U.S. government with intentions of bringing investor and homebuyers together created the secondary mortgage market. This market includes institutions such as Fannie Mae, Freddie Mac, and other insurance companies. These main players are responsible for insuring debt that gives investors the security to invest in traded mortgages.
According to Whitney Hunter in “Contemporary Topics in Finance”, the housing market is currently valued at an estimated $4.5 trillion dollars. In the housing market, lenders provided homebuyers with mortgage loans, which in turn receive mortgage funds. Lenders such as credit union, banks, thrifts or mortgage companies receive funds through deposits or by selling mortgages to investors. Selling mortgages to investors is crucial for both lenders and borrowers with the simple fact that gives banks additional money to lend.
In a secondary mortgage market, the original lender has the option to either keep a mortgage in its portfolio, or to sell the mortgage to investors. The option of selling mortgage to replenish funds helps keep the necessary cash flow in the housing market. Without the relationship of mortgage lenders and investors, the banking system alone would not be capable of funding the entire housing market. The liquidity that a secondary market provides investors correlates to lower interest rates.
It becomes clear that the secondary mortgage market is responsible for housing a great deal of homeowners. Without the trade of securities backed up by the government, the banking system would not provide the necessary loans. People alone could not flourish banks with enough money through deposits. Also, without the insured institutions created by the U.S. government, investors would not be investing in our debt.
Diaz, Julian, and J. Andrew. Hansz. "Political and Legal Environments." Real Estate Analysis: Environments and Activities. Dubuque, IA: Kendall Hunt Pub., 2010. 182-183. Print.
Padhi, Michael. "Fannie Mae and Freddie Mac at Work in the Secondary Mortgage Market." Federal Reserve Bank of Atlanta. N.p., n.d. Web. 17 Apr. 2013.