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Mortgage loans: What is the secondary mortgage market, and why does it matter?

[Sep 14, 2010.]


Homeowners are understandably angry and frustrated when they attempt to get help with their mortgage loans, and can't seem to get anywhere. Mortgage servicing companies not only deal with high volumes of requests and sometimes inadequately trained staff, but also are only the first of multiple entities that may have to approve any changes to the terms of your mortgage loan. Understanding why may help you get through the process with your mortgage company.

Your mortgage loan isn't owned by your mortgage company

Fannie Mae and Freddie Mac were created to buy mortgage loans from mortgage companies for the purpose of generating more money for making mortgage loans. Mortgage companies continued to take care of mortgage loan servicing activities including collecting mortgage payments and paying property taxes and insurance on behalf of borrowers. This system worked well until things got more complicated; mortgage backed securities (MBS) became a popular investment. Mortgage backed securities are investment instruments backed by a group, or "pool" of mortgage loans. Once a loan is sold into a pool, the mortgage servicing company no longer has the flexibility to change loan terms without meeting certain requirements. MBS may be owned by investment firms, mutual funds, or pension funds. This complicates the process of gaining necessary approvals for loan modifications or short sales, where the mortgage investor must agree to take a loss on the original mortgage amount or income generated by the original mortgage rate.

Government mortgage relief programs don't trump other agencies' approval requirements

The federal government has rolled out programs including its Hope Now, Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP). The government relies on mortgage servicing companies for determining your eligibility for these programs, and the government's eligibility criteria may not take into account scenarios involving MBS or private mortgage insurance (PMI). Your loan servicing company must coordinate communication and approvals between you, the mortgage investor, PMI, and others as applicable. Each entity has its own approval criteria, and it can take time for your mortgage servicing company to get all of them on the same page.

What is PMI, and why can it interfere with my request for mortgage help?

PMI is private mortgage insurance. If you borrow more than 80 percent of your home's value, you'll have to pay for PMI if you have a conventional mortgage loan, or FHA mortgage insurance if you have an FHA loan. FHA is a government agency that insures home loans, and is typically cooperative in foreclosure avoidance efforts. PMI companies may be less lenient, and each company has its own criteria for assisting distressed homeowners.

If you're having problems reaching your mortgage company, consider consulting a HUD approved housing counseling agency for help.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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