How the American Mortgage Machine Works

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Every family needs a home, and so do the many risks created by the 30-year mortgage that is standard in America.

Finding an investor to take each of those risks is a job of the Rube Goldberg contraption that is the U.S. housing-finance industry. Investors who don’t understand how it all fits together might one day find themselves scrambling for shelter.

Originators are probably the most familiar players to investors. They sit at the front of the process, and in many cases deal directly with borrowers. But for a mortgage with typical terms and size, they are usually not the player that ultimately owns the loan.

One major reason is the U.S. housing market’s unique system of taxpayer support, via the government-sponsored enterprises. Fannie Mae and Freddie Mac buy loans from originators, guarantee them and resell them to investors as agency mortgage securities. So in turn, many originators’ economics are ultimately driven by the volume of loans they produce and sell via Fannie or Freddie. This business model also avoids lending risk and requires less capital, making it appealing to investors.

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