What incentives do banks have to gather up loans into pools (backed by Ginnie Mae)and selling them?
This is a two part question:
1) I understand that there are certain mortgage loans that when originated by banks can be gathered up into pools and then "sold" to investors, and that these pools are backed by Ginnie Mae, in the sense that, if the borrowers are unable to make payments, and the banks that originated them are also unable to make make payments, then Ginnie Mae would step in and make the payment.
My first question is about the banks. What incentive do they have to gather up the loans in pools and sell them to investors? Because the payments made are not ending up in their pockets, but that of the investors instead.
2) Secondly, I've read that, in this process, Ginnie Mae collects a fee (of a max of 6 basis points). Who is this "fee" levied upon?
I hope my questions aren't too naive and simple to understand. Thanks!
mortgage mortgage-rate
asked 14 hours ago
ricksanchezricksanchez
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add a comment |
This is a two part question:
1) I understand that there are certain mortgage loans that when originated by banks can be gathered up into pools and then "sold" to investors, and that these pools are backed by Ginnie Mae, in the sense that, if the borrowers are unable to make payments, and the banks that originated them are also unable to make make payments, then Ginnie Mae would step in and make the payment.
My first question is about the banks. What incentive do they have to gather up the loans in pools and sell them to investors? Because the payments made are not ending up in their pockets, but that of the investors instead.
2) Secondly, I've read that, in this process, Ginnie Mae collects a fee (of a max of 6 basis points). Who is this "fee" levied upon?
I hope my questions aren't too naive and simple to understand. Thanks!
mortgage mortgage-rate
asked 14 hours ago
ricksanchezricksanchez
584
New contributor
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
1
Recommend reading The Big Short. Fun to read, interesting people in it, also details the CDO debacle, which is related to your question.
– Almo
11 hours ago
Didn't know The Big Short was a book. It's also a very entertaining and enlightening movie.
– JoL
10 hours ago
add a comment |
This is a two part question:
1) I understand that there are certain mortgage loans that when originated by banks can be gathered up into pools and then "sold" to investors, and that these pools are backed by Ginnie Mae, in the sense that, if the borrowers are unable to make payments, and the banks that originated them are also unable to make make payments, then Ginnie Mae would step in and make the payment.
My first question is about the banks. What incentive do they have to gather up the loans in pools and sell them to investors? Because the payments made are not ending up in their pockets, but that of the investors instead.
2) Secondly, I've read that, in this process, Ginnie Mae collects a fee (of a max of 6 basis points). Who is this "fee" levied upon?
I hope my questions aren't too naive and simple to understand. Thanks!
mortgage mortgage-rate
asked 14 hours ago
ricksanchezricksanchez
584
New contributor
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
This is a two part question:
1) I understand that there are certain mortgage loans that when originated by banks can be gathered up into pools and then "sold" to investors, and that these pools are backed by Ginnie Mae, in the sense that, if the borrowers are unable to make payments, and the banks that originated them are also unable to make make payments, then Ginnie Mae would step in and make the payment.
My first question is about the banks. What incentive do they have to gather up the loans in pools and sell them to investors? Because the payments made are not ending up in their pockets, but that of the investors instead.
2) Secondly, I've read that, in this process, Ginnie Mae collects a fee (of a max of 6 basis points). Who is this "fee" levied upon?
I hope my questions aren't too naive and simple to understand. Thanks!
mortgage mortgage-rate
mortgage mortgage-rate
asked 14 hours ago
ricksanchezricksanchez
584
New contributor
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 14 hours ago
ricksanchezricksanchez
584
New contributor
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 14 hours ago
ricksanchezricksanchez
584
New contributor
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 14 hours ago
ricksanchezricksanchez
584
asked 14 hours ago
ricksanchezricksanchez
584
584
New contributor
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
ricksanchez is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
1
Recommend reading The Big Short. Fun to read, interesting people in it, also details the CDO debacle, which is related to your question.
– Almo
11 hours ago
Didn't know The Big Short was a book. It's also a very entertaining and enlightening movie.
– JoL
10 hours ago
add a comment |
1
Recommend reading The Big Short. Fun to read, interesting people in it, also details the CDO debacle, which is related to your question.
– Almo
11 hours ago
Didn't know The Big Short was a book. It's also a very entertaining and enlightening movie.
– JoL
10 hours ago
1
1
Recommend reading The Big Short. Fun to read, interesting people in it, also details the CDO debacle, which is related to your question.
– Almo
11 hours ago
Recommend reading The Big Short. Fun to read, interesting people in it, also details the CDO debacle, which is related to your question.
– Almo
11 hours ago
Didn't know The Big Short was a book. It's also a very entertaining and enlightening movie.
– JoL
10 hours ago
Didn't know The Big Short was a book. It's also a very entertaining and enlightening movie.
– JoL
10 hours ago
add a comment |
1 Answer
1
active
oldest
votes
Say I can lend money at a 10% rate. I lend you $10,000 and the note is for $11,000 due in one year. But, the next day, I can sell the note for $10,100, the buyer willing to get a return of 8.9%. ($11K/$10.1K). Why would I lend that $10K for a year, when I can turn over the loan and make 1% in a day?
The mortgage is more complex, of course. But the concept is similar. Underwriting the loan and selling it into a package (CMOs or Collateralized Mortgage Obligations) lets a small bank help their customer get the mortgage, but not have their funds tied up for decades. At the other end, are investors who can get a return on their money closer to the rate on long term loans.
The concept itself is sound so long at ethical underwriting is maintained, i.e. 20% down, 28/36 debt to income limits, etc. The market blew up when this was ignored, not because the premise was faulty.
The 6 basis points are skimmed from the payments homeowners make for the money then paid to the CMO holders.
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
Yes, this works great for the banks if they can more than double the amount of loans they sell by making risky loans.
– AbraCadaver
11 hours ago
2
Great answer, but doesn't address the second question.
– David Grinberg
10 hours ago
Updated answer to address part deux.
– JoeTaxpayer♦
7 hours ago
add a comment |
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1 Answer
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Say I can lend money at a 10% rate. I lend you $10,000 and the note is for $11,000 due in one year. But, the next day, I can sell the note for $10,100, the buyer willing to get a return of 8.9%. ($11K/$10.1K). Why would I lend that $10K for a year, when I can turn over the loan and make 1% in a day?
The mortgage is more complex, of course. But the concept is similar. Underwriting the loan and selling it into a package (CMOs or Collateralized Mortgage Obligations) lets a small bank help their customer get the mortgage, but not have their funds tied up for decades. At the other end, are investors who can get a return on their money closer to the rate on long term loans.
The concept itself is sound so long at ethical underwriting is maintained, i.e. 20% down, 28/36 debt to income limits, etc. The market blew up when this was ignored, not because the premise was faulty.
The 6 basis points are skimmed from the payments homeowners make for the money then paid to the CMO holders.
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
Yes, this works great for the banks if they can more than double the amount of loans they sell by making risky loans.
– AbraCadaver
11 hours ago
2
Great answer, but doesn't address the second question.
– David Grinberg
10 hours ago
Updated answer to address part deux.
– JoeTaxpayer♦
7 hours ago
add a comment |
Say I can lend money at a 10% rate. I lend you $10,000 and the note is for $11,000 due in one year. But, the next day, I can sell the note for $10,100, the buyer willing to get a return of 8.9%. ($11K/$10.1K). Why would I lend that $10K for a year, when I can turn over the loan and make 1% in a day?
The mortgage is more complex, of course. But the concept is similar. Underwriting the loan and selling it into a package (CMOs or Collateralized Mortgage Obligations) lets a small bank help their customer get the mortgage, but not have their funds tied up for decades. At the other end, are investors who can get a return on their money closer to the rate on long term loans.
The concept itself is sound so long at ethical underwriting is maintained, i.e. 20% down, 28/36 debt to income limits, etc. The market blew up when this was ignored, not because the premise was faulty.
The 6 basis points are skimmed from the payments homeowners make for the money then paid to the CMO holders.
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
Yes, this works great for the banks if they can more than double the amount of loans they sell by making risky loans.
– AbraCadaver
11 hours ago
2
Great answer, but doesn't address the second question.
– David Grinberg
10 hours ago
Updated answer to address part deux.
– JoeTaxpayer♦
7 hours ago
add a comment |
Say I can lend money at a 10% rate. I lend you $10,000 and the note is for $11,000 due in one year. But, the next day, I can sell the note for $10,100, the buyer willing to get a return of 8.9%. ($11K/$10.1K). Why would I lend that $10K for a year, when I can turn over the loan and make 1% in a day?
The mortgage is more complex, of course. But the concept is similar. Underwriting the loan and selling it into a package (CMOs or Collateralized Mortgage Obligations) lets a small bank help their customer get the mortgage, but not have their funds tied up for decades. At the other end, are investors who can get a return on their money closer to the rate on long term loans.
The concept itself is sound so long at ethical underwriting is maintained, i.e. 20% down, 28/36 debt to income limits, etc. The market blew up when this was ignored, not because the premise was faulty.
The 6 basis points are skimmed from the payments homeowners make for the money then paid to the CMO holders.
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
Say I can lend money at a 10% rate. I lend you $10,000 and the note is for $11,000 due in one year. But, the next day, I can sell the note for $10,100, the buyer willing to get a return of 8.9%. ($11K/$10.1K). Why would I lend that $10K for a year, when I can turn over the loan and make 1% in a day?
The mortgage is more complex, of course. But the concept is similar. Underwriting the loan and selling it into a package (CMOs or Collateralized Mortgage Obligations) lets a small bank help their customer get the mortgage, but not have their funds tied up for decades. At the other end, are investors who can get a return on their money closer to the rate on long term loans.
The concept itself is sound so long at ethical underwriting is maintained, i.e. 20% down, 28/36 debt to income limits, etc. The market blew up when this was ignored, not because the premise was faulty.
The 6 basis points are skimmed from the payments homeowners make for the money then paid to the CMO holders.
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
edited 7 hours ago
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
answered 13 hours ago
JoeTaxpayer♦JoeTaxpayer
144k22232465
144k22232465
Yes, this works great for the banks if they can more than double the amount of loans they sell by making risky loans.
– AbraCadaver
11 hours ago
2
Great answer, but doesn't address the second question.
– David Grinberg
10 hours ago
Updated answer to address part deux.
– JoeTaxpayer♦
7 hours ago
add a comment |
Yes, this works great for the banks if they can more than double the amount of loans they sell by making risky loans.
– AbraCadaver
11 hours ago
2
Great answer, but doesn't address the second question.
– David Grinberg
10 hours ago
Updated answer to address part deux.
– JoeTaxpayer♦
7 hours ago
Yes, this works great for the banks if they can more than double the amount of loans they sell by making risky loans.
– AbraCadaver
11 hours ago
Yes, this works great for the banks if they can more than double the amount of loans they sell by making risky loans.
– AbraCadaver
11 hours ago
2
2
Great answer, but doesn't address the second question.
– David Grinberg
10 hours ago
Great answer, but doesn't address the second question.
– David Grinberg
10 hours ago
Updated answer to address part deux.
– JoeTaxpayer♦
7 hours ago
Updated answer to address part deux.
– JoeTaxpayer♦
7 hours ago
add a comment |
ricksanchez is a new contributor. Be nice, and check out our Code of Conduct.
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1
Recommend reading The Big Short. Fun to read, interesting people in it, also details the CDO debacle, which is related to your question.
– Almo
11 hours ago
Didn't know The Big Short was a book. It's also a very entertaining and enlightening movie.
– JoL
10 hours ago