The moment you drop your monthly mortgage payment in the mail is merely the start of a long odyssey for your money.
As we explained last week, if your lender has kept the loan in its portfolio--in other words, kept it on its books--your payment will be processed, your check deposited and the money used to pay interest on deposits and make more loans to new buyers in your area.
But if your lender has sold your loan to another institution, there's a good chance that part of your monthly payment may go to a farmer in Nebraska, an elderly widow in Florida, a big pension fund in New York or even to an investor in London or Tokyo.
Mortgages are bought and sold on the "secondary market"--a vast network composed of lenders, the federal government, quasi-government agencies and Wall Street firms.
"The secondary market is sort of like the water company: Most people don't really understand how it works," said Bill Maloni, an executive with the Federal National Mortgage Assn.
"But when you turn on your faucet, you expect water to come out even though you don't understand exactly how it got there," Maloni said. "And when you go to a lender to take out a loan, you expect the lender to have money--even if you don't know how it got there."
Maloni's agency, nicknamed Fannie Mae, is the biggest player in the secondary market. Last year alone, it bought more than 1 million loans--one of them might have been yours.
Other agencies involved in the secondary market for mortgages include the Federal Home Loan Mortgage Corp., commonly called Freddie Mac, and the Government National Mortgage Assn., or Ginnie Mae.
Many Wall Street firms, such as Bear Stearns and Goldman, Sachs, are also big buyers of mortgages.
Here's how the secondary market works:
You take out a 10% fixed-rate home loan of $150,000 from a bank or savings and loan association. But the bank doesn't want to carry that loan on its books for the next 30 years, in part because it'll wind up losing money on the loan if rates skyrocket in the future.
To eliminate that risk, the bank sells your loan to Fannie Mae, Freddie Mac, Ginnie Mae or a big Wall Street firm. The bank takes the sale proceeds and uses them to make new loans to other borrowers.
In addition, the bank usually agrees to continue "servicing" your loan. This allows the lender to make a little extra money each month by processing your loan payments and sending them to the agency that purchased your mortgage.
The company that bought your loan then pools it with thousands of other mortgages that it has purchased. It then sells shares in these pools to individual investors and big financial institutions.
"Most of these investments are generically called 'pass-throughs,' " said David Andrukonis, an official at Freddie Mac.
"The homeowner makes a payment to the lender, the lender passes it through to us, and we pass it through to the investor," he said.
Why is the secondary market so important?
Well, first, its steady growth over the past several years has smoothed out much of the "boom-and-bust" cyclicality that once ruled the housing and lending business: With Fannie, Freddie and other groups constantly buying mortgages, banks have a steady source of new cash to loan out.
In addition, the growth of the secondary market has helped to ensure that lenders in all areas of the country have cash to loan at any given time.
For example, many lenders in the Northeast have recently had trouble attracting new deposits because of a regional economic slowdown. Obviously, they couldn't make new mortgage loans if they didn't have any money to lend out.
But by selling their existing loans on the secondary market, they can raise the cash they need to make new mortgages and help to prevent a full-scale meltdown of the local housing market.
Meanwhile, investors in the pass-through certificates and similar vehicles issued by Fannie or Freddie Mac get to collect steady monthly income as homeowners make their monthly payments. Most pass-throughs provide better returns than certificates of deposit and many other investments.
It can also be argued that the existence of the secondary market helps keep mortgage rates low. In part, that's because a lender or mortgage banker who makes a loan that will be sold isn't taking as much risk because it won't have to keep the loan until it's paid off.
As an example, notes Maloni at Fannie Mae, interest rates on loans for less than $187,450--the maximum-amount loan that Fannie or Freddie can buy--currently stands at about 10 1/2% for a fixed-rate 30-year mortgage.
Rates on loans for more than $187,450 are about one-half of a point higher because lenders know that they'll probably have to keep these "jumbo" mortgages in their portfolio until the loans are paid off.
Since the long holding period raises their risk, lenders demand a slightly higher rate as compensation for making the loan.
AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of Oct. 26, 1990.