Home Loan Companies

By: EconomyWatch Content   Date: 17 December 2009

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When an individual feels the need to borrow money for a home loan, he applies for a mortgage loan with one or multiple lenders. Home loan companies review the application, verify documents and propose loan terms. The individual finally makes down payment and purchases loan. This is what most of the borrowers know about the lending industry. But have you ever thought what tempts home loan companies to advance money to borrowers?

How Home Loan Companies Work?

Home loan companies are a part of the bigger financial cycle. It is the most basic cycle of money exchange in the economy. To keep the economy flourishing, money exchange is inevitable. In countries where individuals do not make investments or borrowings, economies collapse. This is because demand and supply chain entirely depends on money exchange among different sections of the economy - producers, consumers and service providers.

In most countries, there are government institutions who govern the lending industry. For example, in US, the three major institutions who are nominated for this task are:

  • Fannie Mae (FNMA - Federal National Mortgage Association)

  • Freddie Mac (FHLMC - Federal Home Loan Mortgage Corporation)

  • Ginnie Mae (GNMA - Government National Mortgage Association)

Lending institutions who sell home loan products in the retail market are mere servicers. That is, they act as a link between the actual underwriting institutions, such as Fannie Mae and Freddie Mac, and the end users. Mostly, retail loans become a part of the larger package and are transferred to any of these major institutions. The borrower receives a notification in this regard. However, the terms and conditions applicable to the loan products cannot be changed during this transfer.

Behind the scene, these major institutions provide a part of the loan premium to the servicer company. Usually, this amount is very low. Servicer companies make maximum revenue through underwriting procedures such as file maintenance charges, processing fees and hidden charges. Also, the retail lenders receive more money from the major institutions to continue their lending operations.

At the end of the cycle, these major institutions create mortgage-backed securities. These are traded in the share market and earn money for these institutions.

With this the entire lending process completes. Thus, the opportunity to make money at every stage incites lending institutions to advance loans.


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