The mortgage market, the money supply, and federal regulatory bodies

From loan origination to investment

The primary mortgage market is where borrowers obtain new loans from lenders, including banks, credit unions, and mortgage lending companies. A mortgage broker arranges financing between a borrower and a lender; a mortgage banker originates loans using its own or borrowed funds. Servicing means collecting payments and administering the loan, and it can be separated from loan ownership.

The secondary mortgage market trades existing loans and mortgage-backed securities. Selling a loan can replenish an originator's funds for additional lending. Fannie Mae and Freddie Mac purchase eligible mortgages and support securitization. Ginnie Mae guarantees timely payment of principal and interest on qualifying mortgage-backed securities backed by federally insured or guaranteed loans; it does not originate home loans. Investors supply funds by buying loans or securities.

Money, credit, and the Federal Reserve

Money supply concerns money available in the economy; credit availability concerns the ability to borrow. Commercial bank lending can create deposit money, subject to capital, liquidity, risk, and borrower demand. Neither money supply nor mortgage credit is simply a fixed pile of currency.

The Federal Reserve influences monetary and credit conditions. Under 12 U.S.C. § 225a, its goals include maximum employment, stable prices, and moderate long-term interest rates. The Federal Open Market Committee directs open market policy. Securities purchases generally add reserve balances; sales generally drain them. The Fed also uses administered rates, including interest on reserve balances, to influence short-term rates. The discount rate concerns eligible depository institutions borrowing from Reserve Banks, not a consumer's mortgage rate. Reserve requirements are a traditional textbook tool, but do not assume each policy move changes a required reserve percentage.

Easier monetary conditions tend to support borrowing and spending; tighter conditions tend to restrain them. Mortgage rates also reflect inflation expectations, longer-term market yields, and lending risks. The Fed does not set each mortgage rate, and policy effects are tendencies, not guarantees.

Match the federal body to its job

The Federal Reserve conducts monetary policy and supervises certain banks. The Federal Deposit Insurance Corporation insures eligible deposits at insured banks and has bank supervisory duties; deposit insurance does not protect a borrower from foreclosure. The Office of the Comptroller of the Currency charters and supervises national banks and federal savings associations. The Consumer Financial Protection Bureau administers and enforces federal consumer financial protections, including mortgage-related protections, within its authority. The Federal Housing Finance Agency regulates and supervises Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. Distinguish these oversight roles from loan origination, mortgage insurance, and secondary-market investment.