What Happens to Your Loan?

August 9, 2021

Orion encourages brokers to help your clients all the way from looking for a home to servicing their loan every month after it funds. When their loan closes, we think it is important for you to know what happens next, so it is valuable for Orion’s brokers, and your clients, to understand how mortgage-backed securities (MBS)are formed.

 

When Orion provides a borrower with a home loan through a trained broker, and the borrower agrees to pay the money back by signing a note, Orion has two options. We can either collect the money that the borrower is paying every month, or sell the loan to Fannie Mae, Freddie Mac, or a large aggregator, thereby providing Orion with more cash to make more loans, which is what we do best.

 

Most independent mortgage banks chose the latter option (carried out by the Capital Markets Department).Meanwhile, the aggregator is purchasing thousands of other loans from different lenders that have similar interest rates and terms in order to create a large pool of loans, called a mortgage-backed security. The aggregator then sells parts of the pool to investors, so the aggregator has new funds to purchase more mortgages, create more MBSs and sell parts of them off to investors.

 

This mechanism was created in the 1970s, and has continued to work very well. The investors in these securities, which range from individuals to huge insurance companies and pension funds, know the types of loans that make up the MBS and are comfortable with the risk. In the early 2000s, however, to increase profits lenders lowered their standards and granted loans to subprime borrowers who had low credit ratings and a high risk of defaulting on their loan. Unfortunately for many lenders this didn’t matter because the lender passed the risk of default on to the MBS investors.

 

Lenders such as Orion and investors are once again focused on originating quality loans with solid documentation and appraisals, and once again investors are fully aware of the collateral making up the MBS. This not only helps the flow of funds, but also helps to keep rates low for your borrowers, and that is important! And if you have questions, Orion’s Capital Markets Department is happy to answer them.


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