The real estate mortgage market actually consists of two separate sections: the Primary Market and the Secondary Market. The primary market is where loans are originated; mortgage lenders and banks loan money to borrowers for the purpose of financing real estate transactions. These lenders make their profit on the fees that they charge to fund the loans. They then bundle these loan notes together in a package and sell them in the secondary market.
The secondary market, therefore, manages mortgages that were originated in the primary market. The secondary market consists of investors, both public and private, who buy the mortgage notes. This allows the mortgage lenders to replenish the cash reserves so that they can originate more mortgages to more consumers. The investors profit from the interest that the mortgages charge.
In addition to private investors, which include banks, thrift institutions, and other private individuals, the secondary market consists of a number of public investors. The major entities are the Federal National Mortgage Association (FNMA), or Fannie Mae; the Government National Mortgage Association (GNMA), also known as Ginnie Mae; and the Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac.
Fannie Mae is a U.S. Government-sponsored corporation that was founded in 1938 for the purpose of establishing a secondary market for mortgages insured by the Federal Housing Administration (FHA). It buys mortgages on the secondary market, pools them, and then sells them as mortgage-backed securities on the open market. As stated earlier, this helps to replenish the supply of lendable money in the primary market.
Ginnie Mae is a wholly-owned corporation within the U.S. Department of Housing and Urban Development (HUD). It came into being through a partition of the Federal National Mortgage Association in 1968. Ginnie Mae’s main purpose is to provide financial assistance to low- and moderate-income homebuyers by promoting mortgage credit. It also guarantees the timely payment of principal and interest payments on mortgage-backed securities.
Freddie Mac is a corporation chartered by the U.S. Government in 1970 to purchase mortgages and related securities. It then issues bonds and securities backed by those mortgages in secondary markets. Freddie Mac is also regulated by HUD.
It should also be noted that banks and mortgage lenders do not set the interest rates of the mortgages that they sell. To a very large degree, those rates are set by the secondary market. Investors put their money into the mortgage-backed securities market that is created by these entities, which increases the price of the mortgage bonds and lowers their rates, which in turn lowers the interest rates on mortgages in the primary market. This allows more people to be able to buy and mortgage a home. And because these mortgage-backed securities are investments, their rates will fluctuate just as any other investments’ would.
As you can see, the secondary market is a very important player in the mortgage and home-owning industries.