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By Matthew Coffina, CFA | 12-29-2014 02:00 PM

The Winners and Losers in a Changing Mortgage Market

Increased regulation could advantage high-tech disrupters and firms with economies of scale, says Morningstar's Jim Sinegal.

Matt Coffina: For Morningstar StockInvestor, I'm Matt Coffina. I'm joined today by Jim Sinegal, who is a senior analyst on our financials team. We're going to talk about the mortgage market.

Jim, thanks for joining me.

Jim Sinegal: Thanks for having me.

Coffina: To get us started, could you briefly explain how the U.S. mortgage market works? What is the role of originators, servicers, securitizers, and investors?

Sinegal: Basically, financial-services companies have specialized over time. Whereas banks used to make loans and hold them on their balance sheets, now those roles are filled by a variety of parties. First, you have the originators, the party that actually makes the loan. But instead of holding it, now those loans are mostly sold off to be securitized. The securitized loans are sold to investors, and the actual collecting of payments and disbursing of funds to investors is done by the mortgage servicers. So now, there are four parties at least fulfilling those roles, whereas in the olden days it used to be just one.

Coffina: So, the key securitizers for residential mortgages are Fannie Mae and Freddie Mac. These two organizations have been in conservatorship since the financial crisis. Has that reduced their role in the mortgage market?

Sinegal: No. Actually, they have gained share since they were taken into conservatorship. Basically, the two of them are functioning as arms of the government now, and it's very hard for private players to compete. So, we're seeing Fannie and Freddie guaranteeing about two thirds of all mortgages originated right now. They are raising their fees, and the private market is starting to come back; but as I said, it's very hard to compete with them with the full backing of the federal government at this point.

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