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Where Your Mortgage Check Ends Up : Thanks to the secondary mortgage market, your mortgage can go halfway around the world and fund still more home loans.


Walton and Helen Monagan, after pulling together a $6,000 down payment, needed a $118,000 mortgage to buy the South-Central Los Angeles home they had rented for 17 years.

Meanwhile, thousands of miles away, a Singapore bank was eager to invest $1 million in U.S. real estate like the home the Monagans wanted to buy.

And in Santa Ana, the Flores family decided last spring to refinance their $170,000 home, replacing the original 10% mortgage with an 8.25% loan.

By coincidence, a London retirement fund looking for a safe but lucrative place to invest some $2 million for its pensioners would happily agree to the 8% interest rate the Flores loan will produce.

Santa Ana is a long way from London, and South-Central L.A. is further still from Singapore. So what are the chances that the American borrowers and the foreign investors might ever link up?

The odds improve considerably when two powerful financial matchmakers known best by their nicknames--Fannie Mae and Freddie Mac--enter the picture.

Fannie Mae (the Federal National Mortgage Assn.) and Freddie Mac (the Federal Home Loan Mortgage Corp.) help millions of home buyers across America obtain loans by tapping into Wall Street and the rest of the world's capital markets to raise money for mortgages.

Fannie, headquartered in Washington, and Freddie, based in McLean, Va., were created by Congress (Freddie in 1970 and Fannie in 1983), with the nearly identical missions of generating a steady supply of money for home loans at reasonable rates.

The two stockholder-owned companies, which earned $2.6 billion between them last year, are a powerful force in the home mortgage market. Yet despite their key role in putting buyers in houses, the two companies are little-known by the typical borrower.

Here's who Fannie Mae and Freddie Mac are and how they help home buyers:

The two companies make up a large part of the "secondary" mortgage market, so named because they do not enter the picture until the primary transaction between the home buyer and the "origination lender" is completed.

After the loan is made, Fannie or Freddie may buy the mortgage from the lender. Together, the two companies buy one of every five U.S. mortgages from the origination lenders, which provides the lenders with fresh cash to make more loans. (The remainder of the mortgages are made by S&Ls, banks and private investors who keep the loans in their portfolios.)

Fannie and Freddie then bundle thousands of the mortgages into tradable securities that are large enough--a $500 million agglomeration of individual loans is common--to attract investors such as U.S. life insurance companies, Japanese pension funds, Swiss money markets or the central bank of Zimbabwe.

The rise of the secondary market, which began in the early 1980s, has benefited consumers in a number of ways. Cheaper mortgage money is chief among them. Most estimates credit the companies with lowering interest charges to borrowers by up to a half of a percentage point.

"We provide liquidity at the best price possible for the homeowner without disruption in the mortgage money supply," said Fannie Mae president Lawrence M. Small.

But most home buyers are unaware of Fannie and Freddie's role in their lives.

"We had no idea," said 25-year-old Marlene Flores when she learned of the part Freddie Mac played in her family's financial matters. "We just thought the money came from everybody's savings accounts."

A decade ago or so, Flores' assumption would have been right. Up until the early 1980s, most mortgage money came from deposits in savings and loan associations.

Now, though, instead of individual savers making home purchases possible, money merchants on Wall Street or in the world's other financial centers provide the capital to make home loans. As a result, bits and pieces of American mortgage payments prop up billions and trillions of dollars of financial ventures here and abroad.

It's easy to understand why most American borrowers have never heard of Fannie Mae or Freddie Mac. When their loan closes, most home buyers or refinancers are told where to send their monthly payments and little more.

In the Flores' case, for example, Chatsworth-based Great Western Bank continues to administer, or "service," their mortgage, even though it sold the loan almost immediately to Freddie Mac, said Sam Lyons, a Great Western senior vice president.

"The borrower sees absolutely no difference, because we collect the payments and all contact is with us," Lyons said.

Marlene Flores, though, is more concerned with her family's part in scheme of things. "It does not matter who lends the money," she said. "What is important is that we manage to make the payments every month."

Walton Monagan, a truck driver who bought his long-time rental home with his wife, Helen, an in-home care provider, was nonchalant when told that of Fannie Mae's role in his home purchase. "It doesn't bother me," he said. "As long as I pay my note, they can [take my check] and pay it to the moon if they want."

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