The Mortgage Industry

In brief, HUD oversees Fannie Mae, Freddie Mac, and Ginny Mae.  Fannie Mae & Freddie Mac both purchase  Conventional and Government loans from lending institutions and sell them in pools of mortgages used as collateral for the issuance of securities in the secondary market (wall street) to investors as "Mortgage-backed securities" (MBS). 

MBS are commonly referred to as "pass-through" certificates because the principal and interest of the underlying loans is "passed through" to investors (guaranteed by the full faith and credit of the United States government).  By selling the bonds,  Freddie Mac, and Fannie Mae obtain new funds to buy new pools so lenders can get more money to lend to new borrowers.

Ginnie Mae does not buy or sell loans or issue mortgage-backed securities (MBS).  Ginny Mae guarantees Fannie Mae's & Freddie Mac's Government loans (FHA/VA).  However, Ginnie Mae MBS are created when eligible mortgage loans (those insured or guaranteed by FHA, the VA, RHS or PIH) are pooled by approved issuers (Fannie Mae & Freddie Mac) and securitized.  Ginnie Mae MBS investors receive a pro rata share of the resulting cash flows (net of servicing and guaranty fees).

The interest rate of the security is lower than the interest rate of the underlying loan to allow for payment of servicing and guaranty fees. Ginnie Mae MBS are fully modified pass-through securities.  Regardless of whether the mortgage payment is made, investors in Ginnie Mae MBS will receive full and timely payment of principal as well as interest (a safe investment that earns a higher interest rate than treasury bonds).

NOTE: Conventional Mortgage
A mortgage securing a loan made by private investors without governmental participation (not F.H.A. insured or V.A. guaranteed).  Conforming Conventional mortgages fall within FNMA/FHLMC loan guidelines.

NOTE: Government Loans
A type of mortgage insured by the FHA (Federal Housing Authority), VA (Veteran's Administration), RHS (Rural Housing Authority), or  Office of Public and Indian Housing (PIH).

FHA/VA Mortgages sold to Fannie Mae & Freddie Mac must be sold with recourse.

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Loan amounts exceeding Fannie Mae and Freddie Mac guidelines are called "non-conforming" loans, or "jumbo" loans.  Nonconforming also refers to borrowers that don't meet Fannie or Freddie ideal requirements or loan programs not guaranteed by the government.  These loans are packaged into different pools and are also sold to investors, other than Freddie or Fannie.  Typically, securitized and sold as mortgage backed securities as well.

This buying and selling of mortgages and mortgage backed securities is called "mortgage banking," and it is the backbone of the mortgage industry.

For Commercial Mortgage industry...
see our page on CMBS (Commercial Mortgage Backed Securities)