The Secret Agencies That Real Estate Investors Should Beware
Keywords: real estate, investor, mortgage, invest in real estate, real estate investor
Wondering why your investor loans keep getting scrutinized more closely than terrorists? Well, you need to learn a few things about how the world views these types of mortgages. And that requires a little bit of an education about what happens behind the scenes. After the mortgage is closed and sold off in the secondary markets. The buyers of these mortgages belong to a very secret society. Just kidding! It’s not secret or a society. It’s a usually a federal agency and here’s how it effects us real estate investors.
An agency is just a congressionally chartered corporation which buys mortgages on the secondary market, pools them and sells them as mortgage-backed securities to investors on the open market. Monthly principal and interest payments are guaranteed by the agency but not by the U.S. Government. Examples of agencies in the mortgage industry are Fannie Mae (FNMA), Freddie Mac (FHLMC), FHA and Ginnie Mae (GNMA). All agencies have requirements for the types of loan they will buy or securitize.
This is where rules or guidelines come into play. If the loan is outside of guidelines it is considered non-conforming. Non-conforming loans are also referred to as whole loans. If a loan is outside of Fannie Mae’s standard guidelines, the agencies won’t buy it and the lender either has to service the loan themselves while holding it in their own portfolio or find a whole loan buyer that will buy it from them. Most whole loan buyers are Wall Street companies such as Bear Stearns, Credit Suisse, Lehman, Goldman Sachs and other big Wall Street firms.
Lenders pool whole loans together with credit enhancements to create whole loan collateralized mortgage obligations or CMOs. Credit enhancements are designed to make the loans more palatable and to ensure investors receive timely interest payments. This, my friend, is why there are so many rules about mortgages for investment properties. Because mortgages on investment properties are the riskiest mortgages out there, the originators have to have these crazy rules to make them less risky and more attractive to the end buyer.
In a nutshell, this is why EVERY lender will do a 20% down, 30 year fixed, owner occupied mortgage but only a few will do a 100%, two year adjustable rate mortgage for an investor. The 30 year is an easy sell but they have a harder time unloading the riskier investor adjustable rate loan. Mortgage lenders or originators also have the option of selling the loan and the servicing rights or just the loan or just the servicing. There are lots of different ways to profit from the sale of a mortgage. It helps to know how your lenders will profit to ensure you get the best deal on your financing.
This article isn’t meant to be a course in secondary marketing and mortgage securitization (thank goodness), but it will help to give you an idea of what is going on in the background, in the secondary mortgage markets, and who is really making the rules.
Susan Lassiter-Lyons is the author of Mortgage Secrets for Real Estate Investors, an e-book that helps real estate investors beat lenders at their own sneaky games. Visit www.mortgagesecretsbook.com for more information.
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