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 Mortgage Money

Mortgage Money Financing Sources

Mortgage money is the money a lender has available for home loans which must come from a source.

There are two basic sources: (1) savings generated by individuals and businesses as a result of their spending less than they earn (real savings), and (2) government-created money, commonly referred to as fiat money or printing press money. This second source does not represent unconsumed labor and materials; instead it competes for available goods and services alongside the savings of individuals and businesses. 

In the arena of money and capital, real estate borrowers must compete with the needs of government, business, and consumers. Governments, particularly the federal government, compete the hardest when they borrow to finance a deficit. Not to borrow would mean bankruptcy and the inability to pay government employees and provide government programs and services. Strong competition also comes from business and consumer credit sectors. In the face of strong competition for home loan funds, home buyers must either pay higher interest or be outbid. 

One "solution" to this problem is for the federal government to create more money, thus making competition for funds easier and interest rates lower. Unfortunately, the net result is often "too much money chasing too few goods" and prices are pulled upward by the demand caused by the newly created money. This is followed by rising interest rates as savers demand higher returns to compensate for losses in purchasing power. Many economists feel that the higher price levels and interest rates of the 1970s were due to applying too much of this "solution" to the economy since 1965. 

The alternative solution, from the standpoint of residential loans, is to increase real savings or decrease competing demands for available money. A number of plans and ideas have been put forth by civic, business, and political leaders. They include proposals to balance the federal budget, incentives to increase productive output from available manpower and machines, incentives to increase savings by exempting savings deposit interest from income taxes, and proposals to decrease competition for funds through a credit allocation (rationing) system.

Hence, three major institutions that generate mortgage money: 

  • Fannie Mae 
    (FNMA - Federal National Mortgage Association) 
  • Freddie Mac 
    (FHLMC – Federal Home Loan Mortgage Corporation) 
  • Ginnie Mae 
    (GNMA – Government National Mortgage Association). 

Mortgage Money To Variable Rate