How They Work

In 2003, there was a total of 7.1 trillion dollars worth of mortgages outstanding. Behind all those dollars exists a wealth of mortgage companies that make it possible for Americans to own their own homes. There are many different types of mortgage companies, and each has a different function. Mortgage companies do not always service the loans they make, and they often do not hold the mortgage for its duration. Even if the company does retain the mortgage itself, they may sell the servicing of that mortgage. A separate company may handle the collection and processing. Some mortgage originators actually are more involved in servicing mortgages for other lenders, than they are in originating loans.

Who are the major players in the mortgage industry? A portfolio lender is a mortager who issues mortgages and holds them long-term. More prevalent is the mortgage company which issues mortgages and then subsequently sells them in the secondary market, thereby freeing up their capital to make more loans. Some “mortgage companies” are mere middlemen, called mortgage brokers, who do not originate the loans themselves, but merely arrange the loans for consumers for a commission. The two largest mortgage companies in America, Fannie Mae and Freddie Mac, do not even issue mortgages directly, rather, they buy mortgages from other originators and issue negotiable securities that are backed by those mortgages. There are mortgage companies that specialize in providing loans to consumers with less-than-perfect credit (at higher interest rates, of course), and unfortunately, there are players in the business who engage in predatory and even outright fraudulent practices.

Technology plays a large role in today’s mortgage companies, with computer programs often making the preliminary decision on whether or not to approve a loan. In addition, the Internet adds an extra element of convenience, with online mortgage brokers making it easier than ever for consumers to compare rates between several issuers.

Overall, the history of the mortgage business, its regulation, new enabling technology, and the creation of government-chartered private companies like Fannie Mae and Freddie Mac have created a massive industry out of making homes available to as many Americans as possible.