In the past, when people wanted to get a home mortgage loan, they went to the bank. If the bank had enough money and considered the individual reliable from the standpoint of credit risk, the bank lent him the money from the existing funds.
Now the case is quite different. The money for home mortgage loan comes from three main institutions: Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. The individual gets in touch with the lender and applies for a mortgage loan. The institution performs all the necessary operations and checking and you can possess the house. Thus, you have a home mortgage loan and you perform mortgage payments. You may pay to the company who created the mortgage loan, or your loan may be relocated to another institution. The company you pay to, as a matter of fact, may not be the owner of your loan. They are simply at the service of your mortgage loan. These people are the servicers because they simply service your loan for the institution that possesses this loan.
Your loan is packaged together with many other similar loans and sold to one of the three main institutions. The servicer of this loan receives a monthly fee from the investor for dealing with payments and working with your loan. Some companies prefabricate lots of dollars circulating for home loans. Mortgage servicing is the sphere to make real money for lenders. The whole system of creating mortgages is planned to get loans into the portfolios of the servicers. Mortgage servicing is the activity that allows making the touchable profit. When the loan is packaged together with others and sold to one of the three most important institutions, the lender obtains additional funds and can make more loans. This cyclic activity permits the institutions to lend you money.
Sometimes, the mortgage loan, as the right to serve the loan, may be relocated from the company where you make the payments to some other company. This activity with mortgages and mortgage backed securities is known as mortgage banking, and specialists consider it to be the backbone of the mortgage activity.
After the institutions purchased the pools, they may divide them into smaller parts known as mortgage backed securities. Each security reflects a small ownership interest in the group of which your loan is only a part. The risk is therefore dissipated and reduced and it becomes an extremely safe investment. The mortgage backed securities are sold to institutions or individuals who are in search for safe investments. By selling the bonds, the institutions find new funds to procure new pools.