Dennis' Mortgage Blog

Question of the week:  Why did I get a notification that my loan is with Fannie Mae? I thought it was with the lender we closed with.

Answer: This question comes quite frequently and most recently from a client who recently closed their refinance transaction and about a month later received a notice that their loan was now owned by Fannie Mae. This question also comes from clients who have had their mortgage for some time and are inquiring about a refinance who are in a limited or negative equity situation and are surprised to learn their loan is owned by Fannie Mae.  (Note: Freddie Mac can be substituted for Fannie Mae, though fewer loans are with Freddie than Fannie). 

As I do about every twelve to eighteen months in the Weekly Rate & Market Update, I will use this question as an opportunity to once again go through what happens to mortgages after they fund.  If you are familiar with GSEs, MBS, AUS and other details of the secondary mortgage market you may wish to skip to the economic update below.  If you are unfamiliar with these you may wish to take a few minutes to learn about the part of the mortgage industry that has the greatest impact on whether you qualify for a mortgage and what your rate will be.

First the acronyms I will be using.  Fannie Mae and Freddie Mac are Government Sponsored Entities, or GSEs; GSE is used often to describe not only Fannie and Freddie but conventional mortgages.  The GSEs issue Mortgage Backed Securities, MBS, to investors.  Mortgage professionals and lenders run mortgage applicant’s information through the Automated Underwriting System, AUS, for the GSEs to get loan approvals.

With very few exceptions almost all the loans funded in the current market are approved and funded under the guidelines of FHA or one of the GSEs.  In the case of the GSEs loan originators, such as myself, take the loan application data from a client and run the information through the AUS of either Fannie Mae (most often) or Freddie Mac.  The AUS then issues us an approval or what amounts to a decline. 

Lenders require that we have an approval on mortgages from one of the GSEs via their AUS before we can close a loan; this is because the AUS provides the conditions that must be validated by the lender in order for the GSE to purchase the loan. 

Why does a lender care if they can sell the loan to Fannie Mae or Freddie Mac?

Liquidity.  With a mortgage origination market of around $1 trillion, lenders cannot fund and hold all the mortgages they fund.  As a result they bundle their mortgages into pools which they then sell to either Fannie Mae or Freddie Mac depending on the underwriting guidelines used to approve and fund the mortgages.  While the loan is sold to one of the GSEs, the lender retains, usually, the servicing of the mortgage collecting the monthly mortgage payments.  The lender retains a fee for the servicing and then passes along to the GSEs the remainder of the payments.

So where do Fannie and Freddie come up with almost $750 billion every year to buy these mortgages from lender?

They sell the mortgages; or rather they sell the returns the mortgages provide.  Once Fannie or Freddie purchases a bundle of mortgages from a lender, they package that bundle with others and create a security known as a Mortgage Backed Security (MBS).  On a daily basis MBS from Fannie and Freddie as sold on the market and investors purchase the securities.  With their purchase the investor is getting the revenue generated by the MBS as a result of the thousands of homeowners whose mortgages comprise the investment making their mortgage payments.   The investors determine the mortgage rates being offered by the lenders to you the borrower based on whether they are purchasing MBS at a premium, lower rates, or at a discount, higher rates. 

With the money received from the investors the GSEs are then provided the liquidity they need to purchase mortgages from the lenders and the cycle starts again.

So when you purchase your home in Long Beach, California and fund a conventional mortgage of $400,000 through Stratis Financial, your loan will be funded with money from Stratis, who will sell it to a lender, who will sell it to Fannie Mae, who will sell it to an investor who could be a municipal pension plan for Omaha, Nebraska, a retiree in Fort Lauderdale or a mutual fund headquartered in New York.

Have a question?  Ask me!

Plenty of news this week confirming a stagnant economy that has been unable to provide sustained growth much less robust growth.  Retail sales in April increased less than 1% from March, data from the manufacturing sectors show incremental increases.  Non-farm productivity dropped in the first quarter and labor costs increased.  Combine this data with the drop in GDP growth for the first quarter and we get an economic morass not ready to generate higher economic activity, productivity and jobs.

Speaking of jobs, don’t be fooled by the headlines tomorrow or what is coming across the transom from internet media reports today on the unemployment reports.  Foremost on most reports will be the 8.1% unemployment rate, which should be below 8% in November.  The primary cause of the drop in the unemployment rate is not new hiring but rather people ceasing their search for work and/or falling off the unemployment insurance rolls.  The Labor Department unemployment rate is based upon a phone call to households in a survey that asks if anyone in the home is not working and if they are seeking employment.  If you are not working, want to work but have become discouraged with your searching for a job for three months and decide to quit trying then you are not considered unemployed.

Shrinking employment growth continues.  After closing 2011 with three months of private sector job growth of over 200,000 workers per month April saw a net increase of only 115,000 jobs in the economy.  Demographics require over 185,000 new jobs every month just to retain the same size labor force, adding only 115,000 jobs fails to reach stable over all employment in the economy.  If there is a ray of light in the jobs numbers for April it is that overall government employment shrunk by 5,000 jobs nationwide.  With the bloated payrolls of local, state and federal governments being supported by taxes on private sector incomes any reduction in the size of this workforce is a long term benefit for the economy and future productivity and growth.

Rates for Friday May4 , 2012:  With the constancy of tepid economic data this week investors have seen no reason to invest in stocks and have put their money into bonds and Mortgage Backed Securities.  Lenders are holding on to some of the gains but there has been a tick down in conventional rates from last Friday.  A very stable market that seems to be a bit over-bought and ready for a correction, don’t be surprised if rates next Friday are a bit higher if there is a sell off for profit taking by bond investors.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.50%               Down 0.125

30 year high-balance conforming           3.875%             Flat

30 year FHA                                         3.5%                Flat

30 year FHA high-balance*                   3.75%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.  Rates are based on 20% down (3.5% for FHA)  with 740 FICO score for purchase mortgages.

* Current rates include credit towards closing costs, call for quote on rate and credit.

Cinco De Mayo tomorrow, until I came to California it was just May 5^th as my knowledge of Mexican and Latino culture was precisely nil.  My mother was a native Californian and growing up in Oklahoma and the East Coast for us Mexican food was El Paso boxed taco shells filled with ground beef seasoned from a McCormick’s seasoning packet, some chopped tomatoes, lettuce and grated cheese on top and we were eating Mexican.

When I first went to a Mexican restaurant in Pomona with my new friends at college in September 1980 I had no concept of what a burrito, chimichanga, tostada, enchilada, civiche or even salsa were.  Thankfully my years at college and since have allowed me to fully enjoy a wide breadth of Mexican and Latinon cuisine. Ole!

Have a great week,

Dennis