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Highlight Updates Secondary Mortgage Market

The secondary market is not a place like Wall Street. Rather, this term describes the phenomenon by which originating lenders sell their loans to buyers (often called investors), usually in bulk. This enables mortgage companies specializing in home equity lending to originate large numbers of loans with a comparatively small capital base. Some originators may obtain a line of credit from a major bank or firm, originate mortgage loans, sell the loans to the secondary market, and repay the credit line. The secondary market includes “wholesale” lenders who buy loans from smaller lenders, and the securitization market where mortgage loans are pooled and the interest in cash-flows from those loan-pools are sold to investors.

Fannie Mae and Freddie Mac purchase huge numbers of loans in the secondary market. Congress created these entities to provide liquidity or capital in the housing market by purchasing mortgages. This phenomenon puts money back into the hands of the originating lenders so that new loans can be made. The originating lender must follow certain underwriting guidelines specified by Freddie Mac and Fannie Mae when qualifying the borrower for a loan.