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Mortgage Finance > Mortgage > Secondary Mortgage Market
Here's How The Secondary Mortgage Market Works:
Putting the Process in Motion
Homebuyers apply for mortgages from primary market mortgage lenders such as banks, thrifts (which include savings and loan associations and savings banks), mortgage companies, credit unions, and online lenders.
The primary market mortgage lender evaluates the homebuyer's ability to repay the mortgage, and if the lender's criteria are met, arrangements are made to make the loan. The transaction between the lender and the borrower culminates in what is called "the closing." By signing the closing documents, the lender agrees to fund the purchase of the home and the homebuyer agrees to pay the mortgage as negotiated. Once the loan is closed, the funds are transferred from the primary lender to the property seller.
Entering the Secondary Market
After the closing, the primary lender may either hold the mortgage in its portfolio (along with other loans it has made) or sell it in the secondary mortgage market.
When primary mortgage lenders sell loans in the secondary market, they generally sell them as loans to an institution like Freddie Mac. They then use the proceeds of the sale to make new loans to other homebuyers in their community.
Freddie Mac is one of the largest investors in mortgages. As a major player in the secondary mortgage market, Freddie Mac:
- buy mortgages that meet their underwriting and product standards,
- package those loans into securities, and
- sell the securities to investors on Wall Street.
Investing in Making Homes Possible
The mortgages Freddie Mac purchases are bundled or pooled together as mortgage-backed securities (MBS). Freddie Mac guarantees timely payment of principal and interest to MBS investors and finances these purchases by issuing debt and mortgage securities. Investors value the guarantee and the homogeneous quality and liquidity of MBS over individual mortgages. Because of these attributes, investors in MBS are willing to accept a slightly lower yield as the funds pass through to them from Freddie Mac.
In addition, Freddie Mac provides more funds to the primary mortgage market through portfolio investment. By investing in mortgages, Freddie Mac attracts funds for primary market mortgage lenders from investors who would not otherwise invest in the U.S. residential mortgage market, or who might be averse to prepayment risk.
Freddie Mac uses the funds from sales of these securities sales to purchase more loans from primary lenders. In this way, Freddie Mac is constantly replenishing the pool of funds available for new loans, which allows primary lenders to use the cash they get to originate new mortgages. This makes the mortgage process fast, convenient, and affordable. :
Tangible Benefits
The supply of cash the secondary mortgage market makes available to lenders through this process drives down mortgage rates by as much as one-half percent - saving the homeowner with a $150,000 mortgage around $18,000 in interest over the life of a 30-year loan. That savings helps make homeownership affordable for more families and individuals than would be possible without the secondary mortgage market. As a result, homeownership is a reality for many families, and not just a dream.
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