Opportunity: The Mortgage Process

This is the first post in a series I’m planning on writing that identifies real-world opportunities.  If you haven’t read the post discussing opportunities, read it here first.

My wife and I just recently bought a house.  Throughout the process, I actually saw quite a few opportunities.  I’ve labeled anywhere I noticed an opportunity (potential for profit).

We bought our house for $207,500. From it we took a $166,000 loan at 3.375% interest over 15 years. Over 15 years, our mortgage lender, Southern Living Mortgage (SLM), would make $212,000, or a $46,000 profit on their investment. {OPPORTUNITY}

However SLM was not interesting in keeping and maintaining that loan and wanted to sell it off. So they sold the loan to Franklin American Mortgage (FAM) for a certain amount. While I don’t know what amount it was, let’s just say it was $172,000. This means that SLM just made a profit of $6,000 just for servicing the loan (meaning setting us up with it). Not bad for a week’s work for SLM! {OPPORTUNITY}

FAM was still going to make $40,000 on the loan over the 15 year period. Still not a bad deal for them. {OPPORTUNITY}

Let’s say FAM didn’t have the $172,000 in cash, or wanted to get some cash in their pockets again to get some more loans. They then start looking for investors in their loans. They’re not wanting to sell outright like SLM did, but are instead looking to find people to loan them money and in return give out a part of the $40,000 profit they’re still planning to make.

This is where Mortgage Backed Securities (MBS) come into play. An MBS allows people to invest in a mortgage company’s mortgages. A single investor with $10,000 can’t buy out a whole $172k loan, but can put in his $10k for a small return.

Let me switch to percentages for this part. Our original mortgage was 3.375%. When SLM sold to FAM, FAM essentially held a $166,000 mortgage at a 3% rate (= $40,000 profit). Now that FAM wants to offer an MBS to investors, they offer the investors a 2% return and can still keep a 1% return for themselves. {OPPORTUNITY}

Granted those percentages at the end aren’t the best, but we did have a particularly low interest rate and opted for a 15-yr vs. a 30-yr. Just for comparison, that $46,000 profit at the very beginning would turn into $146,000 for a 30 year loan at 4.75%…. Yikes!

The benefit of investing at any point along this process is relatively safe. SLM is pretty much guaranteed to make a profit as there are many mortgage companies that would love to take the mortgage off their hands. FAM is pretty safe as well since if any homeowner stops paying, they can foreclose on the house and come out with a [$207,500] house. In addition, most MBS investments are government backed, meaning the government will help cover if the market goes south.

The only loser in the whole thing is the homeowner. They’re the ones having to pay the $46,000 (or $146,000 in a 30-yr loan) for all this to work! Of course, they don’t completely lose out as the mortgage process allows them to buy a house in the first place.

So from one transaction, there were 4 potential opportunities.  Did I miss any along the way?

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