When considering purchasing a home in the state of Alabama, one must keep in mind where the money from a mortgage loan comes from. Things operate quite differently nowadays than they used to. In the good old days, when a person wanted to take out a home loan, all they had to do was take a walk to the neighborhood savings & loan or bank. If the bank you went to happened to have extra funds and thought you were a good credit risk, they would lend you the money to buy a home right out of their own pockets.
These days, things work differently. The vast majority of home loans funding comes out of three main institutions. They are the FNMA (Federal National Mortgage Association), the GNMA (Government National Mortgage Association), and the FHLMC (Federal Home Loan Mortgage Corporation.)
How does a mortgage loan work in the here and now? First off, you go in and have a chat with just about any lender. Through them, you can apply for a loan. The lender then does all the processing and performs all necessary verifications on your behalf. Eventually, you will get the house, the home loan, and be required to make regular mortgage payments. The payments might be made to the company you started out at, or perhaps they might transfer it to another financial institution. Very rarely will your loan be owned by the company you make your payments to. That company will more than likely be acting as the “service agent” of your mortgage loan. They are called the “service agent” or simply the “servicer” because that is exactly what they are doing – servicing your loan on behalf of the institution that actually owns your loan.
The process works like this: After you went in, applied and got approved for your home mortgage loan, behind the scenes your loan was then packaged into what is referred to in the industry as a “pool” with a bunch of other people’s loans. This pool package is then sold off to either the FHLMC, the FNMA, or the GNMA. These three mega-institutions do not have time to tend to every single person’s loan, however. That is why there are “servicers” who take care of processing payments and catering to individuals’ loan needs in exchange for a monthly fee, which is paid for by the investor. While the fee is oftentimes very low – usually only around three eighths of a percent – it does add up over time. Some companies service several billions of dollars worth of home loans. Three eights of a percent on a billion bucks makes for a nice income, don’t you think?
Lenders make a lot of money in the mortgage servicing industry. Oftentimes they will only break even – or even lose money – on originating mortgages, which helps the servicers get loans in their portfolio, but does not earn them a lot of money. The big bucks come in on the servicing aspect of mortgage loans.