When you take out a mortgage, you might assume your relationship is just with your local bank or lender. But behind the scenes, your home loan could quickly become part of a vast financial system, which is bought, bundled and sold by government-backed giants like Fannie Mae and Freddie Mac.
For millions of Americans, these companies help keep mortgage money flowing and homeownership within reach.
Here’s what you need to know about how this system works and what it means for you as a homeowner.
What happens to your mortgage if it ends up being securitized by Fannie Mae and Freddie Mac?
If your mortgage meets Fannie and Freddie’s criteria, your lender may sell it to one of these government-sponsored enterprises. The firm will either keep your loan in its portfolio or bundle it with others into a mortgage-backed security, which is then sold to investors. This process helps keep mortgage money flowing and often results in lower interest rates for borrowers.
How does your relationship with your original lender change?
Your relationship can change significantly. When your mortgage is sold by your original lender, the biggest change you’ll notice is who collects your monthly payments. The company you send your mortgage check to is called the mortgage servicer.
“A lot of people are surprised when they hear this … [when] you get your mortgage and you think, ‘I’m going to have Bank of America as my servicer,’ " said Clifford Rossi, professor at the University of Maryland Smith School of Business. "Well, they probably will not be your servicer. Loans get sold and resold into the servicing market … Your loan may pass through several different servicers over the course of, say, even a seven-year average life of a loan."
When you make a payment, the servicer forwards the principal and interest to the loan's owner, which is often an investor like Fannie or Freddie, or financial institution. If you miss payments or need a loan modification, it’s the servicer, not Fannie or Freddie, who works with you to find solutions.
When your mortgage is sold and a new company becomes your servicer, that company isn't free to do whatever it wants. Mortgage servicers have to follow strict rules set by federal regulators like the Consumer Financial Protection Bureau and by Fannie Mae and Freddie Mac themselves. These rules are designed to protect you as a borrower.
“The [government-sponsored enterprises] monitor the servicing very closely of their servicers. In fact, they each individually have scorecards across hundreds of metrics of performance and will monitor and will discuss with them if they start to dip" or if unfair practices start to happen, Rossi said.
Who are these investors buying securities?
Investors in mortgage-backed securities include a wide range of institutions: private investors, life insurance companies, pension funds, hedge funds, banks and even the Federal Reserve. These entities buy securities for their portfolios because they tend to be considered “low risk, solid, stable” investments, Rossi said.
What rights do they have or not have over your loan?
Investors who buy securities have rights to the cash flows (principal and interest payments) from the pool of loans, but they do not have direct rights over the individual loans. They cannot change the terms of your mortgage or decide who services your loan. If a loan in the pool defaults or is prepaid, the investor is compensated according to the terms of the security, but they do not control the underlying assets.
“They have certain rights to the cash. They have rights to the cash flows … but in terms of like, other aspects of controlling the loan assets, it’s not part of what the [mortgage-backed securities] investor really has direct control over,” Rossi said.
It’s worth noting that if you pay off your mortgage early by either refinancing, selling or making extra payments that's known as prepayment. For investors in mortgage-backed securities, prepayment means they get their money back sooner than expected but may have to reinvest it at a lower rate.
Why did the government take over Fannie and Freddie and what does government control mean?
In 2008, during the global financial crisis, Fannie and Freddie were placed into government conservatorship because both overloaded on risky mortgage-backed securities, which posed a systemic risk to the financial system. The government stepped in to stabilize the housing market and ensure the continued flow of mortgage credit. Under conservatorship, both entities are overseen by the Federal Housing Finance Agency, which manages their business operations and financial practices. <u class="rte2-style-underline">Since 2019</u>, the companies have been allowed to retain a portion of their profits instead of sending nearly all to U.S. Treasury.
There is an ongoing debate about a potential exit to conservatorship, which means that both entities could eventually return to private ownership and operate with less direct oversight. The Trump administration has been pushing to release both from federal control by the end of this year.