New Home Purchase Mortgage
A mortgage is a negotiable instrument, like stocks and bonds. It can be bought and sold, or used as collateral. While the quasi-government entities Fannie Mae and Freddie Mac are the nation’s largest purchaser of mortgages, other financial institutions, or even individual investors may also purchase mortgages as investments. Fannie and Freddie purchase mortgages for two reasons.
Of course, they are private enterprises of sorts, and need to make a profit. But also, they have a mandate from the federal government to promote homeownership, and when they purchase mortgages from lenders, those lenders can use the money they receive to make new mortgages, and therefore make more loans than would otherwise be possible.
However, big institutions like Fannie and Freddie, mortgage companies and banks are not the only ones who can buy and sell mortgages. There are several situations where an individual investor may profit from purchasing an existing mortgage.
For example, suppose a person sells a piece of property, and agrees to help with the financing, perhaps because the buyer is unable to qualify for a bank mortgage. The seller then issues a “land contract,” which is a private agreement between two individual parties, where the buyer makes monthly payments to the seller directly, instead of going through a traditional mortgage lender. The seller then, as opposed to a bank, is the mortgage holder. Investors often purchase these land contract mortgages at a discount, and then take over servicing the loan, freeing the seller from having the collect monthly payments on the property and instead receiving a lump sum. Purchasing mortgages in this way can be a very strategic and profitable investment, since you not only gain the interest on your return as it is being paid by the homeowner, you also get the benefit of the discounted rate at which you purchase the note.
For example, suppose a seller holds a land contract for $100,000. You, the investor, buy it for $90,000. But the homeowner who lives in the home still owes you the $100,000. You get the difference, and you are also getting interest on the full amount.