What is a Dwarf?
How Does a Dwarf Work?
mortgage from XYZ Bank. XYZ Bank transfers into your account, and you agree to repay the money according to a set schedule. XYZ Bank (which could also be a thrift, credit union, or other originator) may then choose to hold the mortgage in its portfolio (i.e., simply collect the interest and principal payments over the next several years) or sell it.are securities that represent an interest in a pool of . Let's assume you want to buy a house, so you get a
If XYZ Bank sells the mortgage, it gets to make other loans. So let's assume that XYZ Bank sells your mortgage to Fannie Mae. Fannie Mae groups your mortgage with similar mortgages it has already purchased (referred to as "pooling" the mortgages). The mortgages in the pool have common characteristics (i.e., similar interest rates, maturities). Pools that mature in fewer than 15 years make up dwarves.
Fannie Mae then sells securities that represent an interest in the dwarves, of which your mortgage is a small part (called securitizing the pool). It sells these to investors in the . With the from the of the , Fannie Mae can purchase more mortgages and create more .
Why Does a Dwarf Matter?
For investors, an dwarves are relatively short-term in this sense However, it is important to that payments that are part interest and part could be unfavorable to some dwarf investors, because with each decrease in outstanding principal there is a corresponding decrease in the amount of interest that . The return of principal could also vary depending on how quickly the underlying mortgages are repaid.
Fannie Mae guarantees the timely payment of interest and principal on the they issue -- that is, if the borrowers do not make their payments on time, Fannie Mae still make timely interest and principal payments to their investors. It is important to that the U.S. government does not Fannie Mae. That is, if it cannot fulfill their obligations to its investors, the government has no responsibility to rescue it.