Audit and Accounting Guide - Depository and Lending Institutions

Chapter 4 Industry Overview — Mortgage Companies

Description of Business

4.01 As a result of the relative imbalance between the supply and demand for residential mortgage funds, mortgage banking entities play an integral role in providing mortgage capital based on housing finance demands of the general public in various geographic locations. The market where mortgage banking entities originate loans to borrowers is referred to as the primary market. The market where originated loans and mortgage-backed securities (MBS) trade is referred to as the secondary market.

4.02 The principal participants in the secondary market for residential financing are government sponsored entities (GSEs), such as the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Also active in the secondary market are federal agencies such as the Government National Mortgage Association (Ginnie Mae), the U.S. Department of Veterans Affairs (VA), and the Federal Housing Administration (FHA). These entities participate in the secondary market as issuers, investors, or guarantors of asset-backed securities (ABSs) such as MBSs, real estate mortgage investment conduits, and collateralized mortgage obligations. Private entities have also been active in the secondary market as issuers, investors, and guarantors, though the extent of their participation has varied significantly in response to market conditions. (Chapter 7, “Investments in Debt and Equity ...