If you’ll remember the movie It’s A Wonderful Life, you’ll certainly recall the scene where there was a semi-bank run by those who thought Bailey Building and Loan was going to fail. They were all told that some of their funds were indeed made into loans for others. A house was bought with those funds, for example. Therefore, when they wanted their money, there was no cash on hand to fulfill everyone’s request. So how does that compare to today’s mortgage market?
One of the main differences is that mortgage loans are not issued using other depositor’s accounts. There’s simply not enough cash on hand to meet that request. Compared to the movie, funds in a bank’s vault aren’t used to finance someone’s home. Instead, when someone applies for a mortgage, the lender will certainly issue the home loan but do so not without the benefit of customer’s checking and savings accounts but issue the needed funds drawn from a line of credit.
From the tiniest of credit unions to the mega-banks, this is how most every mortgage is issued. Think of it this way. Say that a bank has a million dollars in its vault for the sole purpose of issuing home loans. After ten $100,000 loans are issued, the vault is essentially empty. The lender is no longer a lender because it doesn’t have any money available to lend. Instead, the lender uses a line of credit it has established and draws the money from there.
But the line of credit also has limits. At some point the line of credit is maxed out and there is no more money available. Yes, the lender can collect the monthly payments in the form of interest and principal, but that would take a very long time to replenish the line of credit to the point where still more loans can be made.
To replenish this line of credit, the lender can then sell the loan, either individually or in a bulk sale in the secondary market. Most often this sale is made to Fannie Mae. Fannie buys the loans thus replenishing the lender’s line of credit. Without being able to sell loans, the mortgage market would ultimately come to a stand still.
That’s where mortgage money ultimately comes from. Banks use a line of credit and when that line of credit hits its limit, sales are made to allow the lender to continue being a lender.