Your Mortgage, Their Business

  1. You, the borrower, work with a broker or directly with a lender to get a home-purchase loan or a refinancing.
    • Get: money needed for a house purchase or cash from refinancing.
    • If the loan goes bad: house can be repossessed
  2. Broker: Finds a lender who can close the loan. They usually have a working arrangement with multiple lenders.
    • Get: Takes fees for doing the preliminary sales and paperwork.
    • If the loan goes bad: May get cut from lender’s approved broker list.
  3. Lender: Often funds loan via ‘warehouse’ line of credit from investment bank. Then sells loan to investment bank.
    • Get: Take up-front fees for making the loan
    • If the loan goes bad: Can be forced to take back loan if there’s an early default or documentation is questionable.
  4. Investment Bank: Package the loans into a mortgage-backed bond deal, often known as a securitization. Sells the securitization sorted by risk to investors. Lower-rated slices take the first defaults when mortgages go bad, but offer higher returns.
    • Get: Collects fees for packaging the loans into bond deal
    • If the loan goes bad: May push back loan to lender, or be forced to eat any loss.
  5. Investors: Choose what to buy based on their appetites for risk and reward.
    • Get: Earn intesests on the bonds and absorb any gain or loss in price of the bond.
    • If the loan goes bad: May have legal recourse against bank if they can show the quality of the loan or loan documentation was misrepresented.
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