The Secondary Market
Mortgage-Backed Securities and the Secondary Market:
Here’s a quick overview of the Secondary Market for mortgages:
- A buyer applies for a mortgage from a primary lender (banks, savings & loans, mortgage companies, credit unions, etc.)
- The lender evaluates the buyer and if approved, the lender makes the loan. In signing the loan papers, the buyer agrees to make the payments as described in the loan agreement, and the lender agrees to fund the purchase of the property.
- After the loan closes, the lender can either hold on to the mortgage in its portfolio, or sell it on the secondary market to a company like Ginnie Mae, Freddie Mac or Fannie Mae
- The lender then uses the money gained from the sale to make new loans
- The purchaser of the mortgage gathers it with similar other mortgages (pooling) and issues a security (a Mortgage-Backed Security or MBS)
- These MBS are bought by investors who are attracted by the government guarantee of regular payments
Ginnie Mae, Freddie Mac and Fannie Mae then take the money gained from the sale of the security and use it to buy more mortgages from lenders.
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