A mortgage aggregator is a middleman in the secondary mortgage market who buys individual mortgages from financial institutions, packages them as mortgage-backed securities (MBS), then sells them in bulk. This is a mutually beneficial arrangement in that the aggregator profits through a bulk sale, and the buyer lowers his risk with secured, pooled investments.
What is the Secondary Mortgage Market?
Not all mortgage loans come directly from a primary mortgage market loan originator to the borrower. Like any other commodity, many mortgages are routinely bought and sold by third parties to both minimize risk and increase profit. Besides the financial interests of a mortgage aggregator, the large secondary mortgage market also aids in stimulating the economy through additional home construction and more readily accessible loans. This market is a combination of private investors as well as such government-backed agencies as Freddie Mac, Fannie Mae, Ginnie Mae and Federal Home Loan Banks.
What Are Mortgage-Backed Securities?
As mentioned, mortgage-backed securities include a pooled risk of many individual mortgage loans. They are secured because they are backed by a pool of investments, rather than an individual borrower who may or may not be able to cover the loan amount in the case of default. Like other aspects of the secondary mortgage market, these are sometimes secured through private financial institutions and sometimes through government agencies. While many different types and processes of MBS exists, the most important factor is that they pool the risk for the buyer.
What is the Relationship Between an Originator and Aggregator?
As the name suggests, a loan originator is the original source of the loan in the primary mortgage market. They are typically financial institutions or mortgage bankers. They typically work directly with borrowers to provide financing when purchasing a new home. However, most often, once the loan is originated they will then sell individual mortgages to mortgage aggregators to lower their long-term risk of changing interest rates, individual investments and other changing economic factors. They make a profit by charging a fee to mortgage aggregators for their work in originating the loan.
How Does the Mortgage Aggregator Profit?
Mortgage aggregators make money by buying the individual mortgages at reduced rates, combining them, and then selling them to a large market at higher rates. However, it is important to note that mortgage aggregators are not always a separate, third party. Sometimes loan originators themselves will pool together many of their individual mortgages and sell them without the middleman.
What Are Buyers' Benefits?
When a financial institution purchases a pool of mortgages from a mortgage aggregator, it is making a low-risk investment that frees it from worrying about each borrower having the assets to cover the loan in the case of a default. Sometimes this security may come at a higher premium, but often lowers the overall loss and risk over time.
- Modern Real Estate Practice: Galaty, F., et. al.
- Digital Vision./Digital Vision/Getty Images