If you have recently purchased a home, you may have received notification that your mortgage was being sold to another investor. While the selling of your mortgage has no effect on the conditions and terms of your mortgage, the secondary mortgage market greatly impacts the real estate market and the financial sector as a whole.
Definition
The secondary mortgage market is made up investors that buy mortgages from primary lenders such as banks and mortgage brokers after they have been purchased by consumers. According to the National Association of Home Builders, primary lenders originate mortgages and sell them to the secondary mortgage market. A mortgage sale to a secondary mortgage market investor has no impact on the consumer's loan. As a homeowner, you will see no difference in the amount you pay, when you pay or any terms you have may have signed in your original home loan. The only difference, to you, is the name on the loan and who receives your monthly payment.
GSEs and the Secondary Mortgage Market
Government-sponsored enterprises (GSEs), commonly known as Freddie Mac and Fannie Mae, impact the secondary mortgage market through the purchase of mortgages, allowing loan originators to gain liquid assets so they can originate even more mortgages as well as creating opportunities for homeowners to purchase homes they normally would not qualify to buy. In turn, those investments are typically packaged into mortgage securities and sold to investors as a means of building portfolios. Freddie Mac and Fannie Mae either hold home mortgages they have purchased for their own investments or sell to other investors as mortgage securities to put in their portfolios. Fannie Mae and Freddie Mac and both are influential in the secondary mortgage market. For example, according to FreddieMac.com, in the first quarter of 2011, the company provided $105 billion in liquidity funds to the housing market and financed 430,000 single-family homes.
Role of Private Investment Companies
Commercial banks as well as private investing firms are another component of the secondary mortgage market. Banks originating residential loans regularly sell to GSEs as a way to gain liquid assets used to keep originating loans, while mortgage banks such as Wells Fargo, for example, financial investment firms, and other companies selling mortgage securities also purchase loans to add to their portfolios to form investment-grade securities based on mortgages. According to the National Association of Home Builders, the secondary mortgage market provides a means of redistributing funds, allowing banks to move monies from areas where funds are at a surplus to more struggling markets through the sale of mortgages. In addition to gaining liquid assets, banks also use the sale of home loans to reduce their own credit risks. Mortgages are long-term investments with uncertain returns, and the secondary mortgage market allows banks to replace uncertain credit risks with more stable products while at the same time increasing their available capital.
Disadvantages of the Secondary Mortgage Market
While the secondary housing market provides opportunities for many consumers, when mismanaged, the results can be devastating. In the good times, the secondary mortgage market provides liquid assets for banks and allows consumers to purchase residential homes that they normally could not afford. Yet, the practice of putting people in homes, especially homes beyond their reasonable means, nearly led to the crash of the U.S. financial system and played a large role in causing the Great Recession of 2007 through 2009. Lenders looking to make a quick profit extended loans to unqualified buyers, using lax underwriting standards and predatory lending methods to put people in homes that they never should have purchased, resulting in the rise of the sub-prime and non-confirming mortgage market. Those loans then were sold as investment-grade mortgage securities, spreading throughout the financial sector to some of the largest banks in the world. When mortgage holders began defaulting on their loans in droves, the secondary market crashed, weighed down by suddenly toxic debt, and since the mortgage securities were spread through the financial sector, the scope of the crash escalated, nearly bringing down the U.S. economy.
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