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Understanding the Mortgage Pathway

As a homeowner, you know that you have several ongoing responsibilities. High on the list is ensuring your humble abode is properly maintained - both inside and out - so it retains its value.

An additional major task is keeping up with your monthly mortgage payment. It's a regularly occurring errand that gets you one step closer to full-fledged ownership.

Once the check is in the mail, payments are out of sight, out of mind. But have you ever wondered where that check actually goes? One would naturally assume it goes to whoever made the loan in the first place, such as a bank or mortgage servicing company.

While this is in part true, the mortgage payment paper trail is much more involved and intricate than one and done. In short, just as there are many working parts to finding or buying a home, the same is true for paying off your home loan.

Let's examine how it all works on a step-by-step basis. It can help you get a better sense of some of the lesser-known aspects related to financing and the housing market from a dollars and cents perspective.

Mortgage servicer sends payment to GSE

As soon as your lender receives your monthly payment, the process is underway. This starts when the servicer takes out a small fee for the administration of the loan and escrow account, which is used to fund property taxes and hazard insurance.

What remains usually goes to one of three government-sponsored enterprises: Fannie Mae, Freddie Mac and Ginnie Mae. GSEs (government-sponsored enterprises) are financial services organizations that are chartered by the U.S. Congress and serve many different functions, such as oversight and enhancing the flow of credit and liquidity.

Were it not for these organizations, homeownership would likely be more difficult to attain.

GSE bundles loans and sells them as mortgage-backed securities

Following the money gets a little bit trickier once your mortgage payment gets into the hands of mortgage-backing giants like Fannie and Freddie.

At this point, GSEs take the payments on the loan and bundle them with many others. Think of it as a package. These packages are known as mortgage-backed securities (MBS). Pooling loans together allows large banks to then sell them as shares to investors.

The individual or institutional investors are ultimately the ones who make the funding available for mortgages because they purchase the loans.

Their ability to be repaid is contingent on the end-user - the homeowner - submitting their mortgage payment consistently. 

Who are these investors?

Much like homes themselves, investors come in all shapes and sizes.

Generally speaking, though, investors that purchase shares in MBSes are large pension or mutual funds. Some of the more common ones include J.P. Morgan, PIMCO and Morgan Stanley. Their valuation is what allows them to buy and make the funds available to homeowners.

They make money by collecting on the dividends accrued through interest on these mortgage payments. In essence, the interest earned goes into these mutual funds as earnings on the original purchase of the mortgage security.

MBS were game-changers

Mortgage-backed securities revolutionized the residential real estate industry by making homeownership far more achievable for families operating on a budget who may not have adequate funds otherwise.

Created in 1963 through the Housing and Urban Development Act - during the administration of Lyndon B. Johnson - MBSes provided more liquidity in the marketplace by allowing non-bank financial institutions and investors to participate, as noted by The Balance.

Evidence of this fact is the homeownership rate, which naturally waxes and wanes but has risen significantly from 50-plus years ago. According to the most recent statistics available from the U.S. Census Bureau, nearly two-thirds of Americans own residential property. In the 1950s, homeownership hovered in the 40% range among single individuals, according to archived Census figures. 

How paying off your mortgage benefits you long term

Being consistent with paying off your home loan is smart for a variety of reasons, not the least of which is it helps to improve or maintain your credit score. It also gets you on the road to saving more of your hard-earned money by fully owning your residence one check or automatic deduction at a time.

But if you have any kind of pension or retirement account with investments in bonds and mutual funds, you're building a better retirement - in a roundabout way - through the interest from those ongoing payments. According to polling conducted by Gallup, 62% of Americans who have yet to retire anticipate stock or mutual fund investments to be a source of income once they exit the workforce.

Following the mortgage payment pathway is a bit complicated. But starting your journey couldn't be simpler by going through Residential Mortgage Services. Contact us to learn more.