Table Funding

Definition

Table funding is a practice in the mortgage industry whereby a lender originates loans using their own capital. Once a sufficient number of loans have been originated, they are packaged together and sold in the secondary market to entities like Freddie Mac or Fannie Mae. This transaction allows the lender to reclaim their capital and continue lending operations independently.

Examples

Example 1: The Great Mortgage Company originated 50 mortgage loans, table funding the loans with $4 million of its own money. Once the loans are packaged and sold to Freddie Mac for $4.5 million, the company recoups its initial capital and gains a profit, which enables more lending activities.
Example 2: Acme Lending uses table funding to finance 100 fixed-rate home loans totaling $10 million. After packaging and selling these loans in the secondary market to Fannie Mae for $10.7 million, Acme Lending recoups its investment plus additional earnings to support future loan origination.

Frequently Asked Questions

What is the main benefit of table funding for lenders?

The primary benefit is the ability to quickly recoup invested capital, enabling continuous lending and operational efficiencies within the mortgage origination process.

How does table funding differ from traditional loan funding?

In traditional loan funding, lenders may hold loans on their balance sheets for a significant period, whereas table funding involves quickly selling these loans in the secondary market to replenish working capital.

Who typically buys the packaged loans in the secondary market?

Entities such as Freddie Mac, Fannie Mae, and other institutional investors in the secondary market are the primary buyers of these loan packages.

Is table funding risky for lenders?

It can be, as it requires accurate assessment and swift management of loans to ensure profitability while waiting for the loans to be sold. Lenders depend on the demand and prices in the secondary market.

Can table funding be used for commercial loans?

While it is more commonly used in residential mortgages, table funding can also be applied to commercial loans, provided there is a viable secondary market for such loans.

Secondary Market: A financial market where previously issued securities and financial instruments such as mortgages are bought and sold.
Freddie Mac (Federal Home Loan Mortgage Corporation): A government-sponsored enterprise (GSE) that buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors.
Mortgage-Backed Securities (MBS): Investments that are secured by mortgages, which provide an income stream based on the payments made on the underlying mortgages.
Origination: The process by which a borrower applies for a new loan, and a lender processes that application.

Online Resources

References

Mortgage Bankers Association. (2023). Mortgage Bankers’ Handbook on Table Funding.
Freddie Mac. (2023). Understanding the Secondary Mortgage Market.
Investopedia. (2023). Glossary of Investing Terms.

Suggested Books for Further Studies

“The Mortgage Professional’s Handbook” by Jess Lederman and Thomas R. Brennan
“The Color of Law: A Forgotten History of How Our Government Segregated America” by Richard Rothstein
“The Big Short: Inside the Doomsday Machine” by Michael Lewis
“Real Estate Finance & Investments” by William Brueggeman and Jeffrey Fisher
“Investing in Apartment Buildings: Create a Reliable Stream of Income and Build long-Term Wealth” by Matthew A. Martinez

Real Estate Basics: Table Funding Fundamentals Quiz

### What is table funding primarily used for? - [ ] Traditional loans without selling. - [x] Originating loans with internal capital and selling them. - [ ] Acquiring existing mortgage services. - [ ] Insuring loans and bonds directly. > **Explanation:** Table funding involves originating loans using internal capital and selling these loans in the secondary market to recoup the investment. ### Who commonly buys packaged loans in the secondary market? - [ ] Individual home buyers - [ ] Credit card companies - [x] Entities like Freddie Mac and Fannie Mae - [ ] Real estate agencies > **Explanation:** Secondary market entities such as Freddie Mac and Fannie Mae are primary buyers of packaged loans in table funding scenarios. ### What does a lender achieve by using table funding? - [x] Quickly recoups capital for further lending. - [ ] Increases property value. - [ ] Lowers interest rates initially. - [ ] Gains long-term loan management benefits. > **Explanation:** Table funding allows lenders to quickly recoup their capital, thus enabling continuous loan origination. ### Which term describes the mortgage industry's practice of selling originated loans? - [ ] Primary market - [x] Secondary market - [ ] Foreclosure market - [ ] Tertiary market > **Explanation:** The secondary market involves the sale of previously issued loans and mortgages, which is a part of the table funding process. ### Is table funding exclusively used for residential mortgages? - [ ] Yes, based on current trending data. - [ ] No, it's exclusively for commercial loans. - [ ] It's used equally for both. - [x] No, while common for residential, it can be used for commercial loans. > **Explanation:** Table funding is commonly used for residential mortgages, but it can also apply to commercial loans. ### What does table funding enable a lender to do upon successfully selling packaged loans? - [ ] Keep the loans permanently. - [ ] Reduce mortgage rates drastically. - [ ] Avoid future business risks. - [x] Reclaim capital invested in loan origination. > **Explanation:** Table funding helps a lender reclaim the capital invested in originating loans, allowing continuous lending. ### In table funding, how are profits typically made? - [ ] Profits are not made from table funding. - [x] By selling loans at a higher price in the secondary market. - [ ] Directly from mortgage insurance. - [ ] Through borrower service fees only. > **Explanation:** Profits are made by selling packaged loans at a higher price than their origination cost in the secondary market. ### What does 'origination' mean in the context of table funding? - [ ] Repaying a loan with interest. - [ ] Refinancing an existing mortgage. - [x] The process of applying for, and getting approved for, a new loan. - [ ] Liquidating real estate assets. > **Explanation:** Origination refers to the process of a borrower applying for, and a lender completing the approval process for, a new loan. ### What kind of entities are typically involved in purchasing packages of table-funded loans? - [ ] Retail consumers. - [ ] Government subsidies. - [x] Secondary market participants like Freddie Mac. - [ ] Local real estate brokers. > **Explanation:** Secondary market participants such as Freddie Mac typically purchase packaged table-funded loans. ### What is necessary for a lender to successfully implement table funding? - [x] A reproducible capital recycling strategy. - [ ] Extensive property holdings. - [ ] Unlimited mortgage lending licenses. - [ ] Partnerships with international banks only. > **Explanation:** A successful table funding strategy requires a system in place for consistently recycling capital through the packaging and selling of loans.