Final answer:
The flow of funds on a payment from an FHA borrower first goes to the servicer/originator, who splits the payment between principal and interest. the principal is directed to the MBS investors while the interest provides income to investors minus servicing fees. GNMA guarantees the MBS, and FHA insures the loan.
Step-by-step explanation:
To describe the flow of funds on a payment from an FHA borrower to an MBS investor, we need to consider several parties involved - the FHA borrower, the servicer/originator, GNMA, and the FHA itself. When an FHA borrower makes a mortgage payment, the funds first go to the servicer/originator. The servicer then separates the payment into principal and interest. The principal repayment goes back to the investors in the Mortgage-Backed Security (MBS), while the interest serves as compensation for the investors, with a portion typically retained by the servicer as a fee for their services.
GNMA, also known as Ginnie Mae, guarantees the MBS, ensuring investors receive their payments, thereby playing a critical role in the flow of funds. The role of the FHA is to insure the loan, which provides an additional layer of security for the investors. This insurance guarantees that in the event of a default, the FHA will compensate the lender for a portion of the losses. in summary, each mortgage payment made by the FHA borrower is split, with the principal going to MBS investors and ensuring the return of loaned capital, and the interest functioning as the income for the investors, after servicing fees are deducted.