When a lender issues a mortgage, the lending company has the option to keep the mortgage debt or sell it to an investor. When a mortgage lender chooses to sell the mortgage, they usually bundle it with other loans. A bundled mortgage is a loan that's packaged with other loans for resale.
Many mortgage lenders keep some loans in their portfolio as a way to generate regular interest payments over the long-term. Any mortgages that are not needed for the lender's portfolio can be sold off to other investors. During this process, the lender places several mortgages that it has written into a group. Investors pay a lump sum of money for the entire package of bundled mortgages, and are then entitled to the borrower's regular mortgage payments.
The basic idea behind bundling mortgages for resale is to create an attractive investment for institutional investors who want to buy loans. Each mortgage that a lender writes has a certain level of risk attached to it. This risk is gauged by looking at the credit score, income and debt level of the borrower. By combining many mortgages into a single package, the mortgage lender can create a diversified portfolio of loans to sell to an investor.
Buyers of bundled mortgages often assemble them into pools of mortgages designed to create mortgage-backed securities. Mortgage-backed securities are a type of investment in which the investor receives a portion of the interest payments from all of the mortgages in exchange for their investment. These securities are grouped together by risk level and are typically sold by governmental agencies like Ginnie Mae or Fannie Mae. These pools of mortgages can be affected by high foreclosure rates and changes to market interest rates, as many homeowners choose to refinance.
Impact on Homeowner
When you take out a mortgage, you might make a trip to your local bank and handle everything locally. While some loans stay in-house, yours might be bundled and sold to an investment group or government agency. Although your loan payments may be sent to another entity, this doesn't have any impact on you. You are still bound by the original terms that you agreed to when you took out the loan.