Secondary mortgage market

Have you heard of the secondary mortgage market but aren’t sure what it means? Bankrate explains.

What is the secondary mortgage market?

Mortgage originators sell home mortgage loans to investors on the secondary mortgage market. Loan aggregators buy mortgage loans from originators, bundle them together into mortgage-backed securities (MBS), and sell them to investors such as pension funds and hedge funds.

Deeper definition

The secondary mortgage market lowers the cost of mortgages and increases access to home financing, while also pushing down interest rates and equalizing rates across the United States. Conversely, it also means that consumers have less control over who handles their loan. A homebuyer may obtain a loan from one lender, but in most cases the loan can change hands several times over the life of the note, making for not infrequent changes in the company responsible for managing the loan and handling payments.

The secondary mortgage market first emerged in the 1930s, when Congress chartered the Federal National Mortgage Association (also known as Fannie Mae) to provide liquidity for the struggling home loan industry. The market evolved rapidly over the course of the post-World War II housing boom, and by 1968 Congress had chartered a second body, the Federal Home Loan Mortgage Corporation (also known as Freddie Mac), to diversify the industry.

The primary mortgage aggregators are Fannie Mae and Freddie Mac, both of which bundle together mortgage loans and sell them to investors as MBS, backed by the value of the mortgages. Problems related to this market were a primary cause of the financial crisis of 2008, otherwise known as the Great Recession.

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Secondary mortgage market example

Loan originators issue home loans, but they seldom have the capital to fund a 15- to 30-year mortgage for the life of the loan. A homebuyer can obtain a mortgage from a small company that only offers mortgages, instead of obtaining a mortgage directly from a bank. This company sells the loan to Freddie or Fannie, or possibly a large national bank, which will bundle it into a MBS and sell it as a long-term investment to an insurance company or a pension fund.

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