SECONDARY MORTGAGE MARKET
Cycle of mortgage money flow /
Fannie Mae / Government National Mortgage Association / Freddie Mac
Lenders, investors and government agencies that buy loans already originated by someone else, or originate loans indirectly through someone else, constitute the secondary mortgage market.
Secondary mortgage market organizations include:
- Federal National Mortgage Association (FNMA, or Fannie Mae)
- Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac)
- Government National Mortgage Association (GNMA, or Ginnie Mae)
- investment firms that assemble loans into packages and sell securities based on the pooled mortgages
- life insurance companies
- pension funds
- primary market institutions who also invest as secondary lenders
Cycle of mortgage money flow
Secondary mortgage market organizations buy pools of mortgages from primary lenders and sell securities backed by these pooled mortgages to investors. By selling securities, the secondary market brings investor money into the mortgage market. By purchasing loans from primary lenders, the secondary market returns funds to the primary lenders, thereby enabling the primary lender to originate more mortgage loans.
Primary lenders make a profit on the sale of loans to the secondary market. The secondary market acquires a profitable long-term investment without having to underwrite, originate, and service the loans. Secondary market organizations customarily hire primary lenders or loan servicing companies to service mortgage pools.
Secondary market loan requirements. The secondary market only buys loans that meet established requirements for quality of collateral, borrower and documentation. Since many primary lenders intend to sell their loans to the secondary market, the qualification standards of the secondary market limit and effectively regulate the kind of loans the primary lender will originate.
As major players in the secondary market, the Federal National Mortgage Association (FNMA, “Fannie Mae”), Government National Mortgage Association (GNMA, “Ginnie Mae), and Federal Home Loan Mortgage Corporation (FHLMC, “Freddie Mac”) tend to set the standards for the primary market.
Fannie Mae
The Federal National Mortgage Association (FNMA, or Fannie Mae) is a government-sponsored enterprise, originally organized as a privately-owned corporation. As a secondary market player, it:
- buys conventional, FHA-backed and VA-backed loans
- gives banks mortgage-backed securities in exchange for blocks of mortgages
- offers lenders firm loan purchase commitments, provided they conform to Fannie Mae’s lending standards
- sells bonds and mortgage-backed securities
- guarantees payment of interest and principal on mortgage-backed securities
Conforming and non-conforming loans. Loans that meet the guidelines of Fannie Mae are called conforming loans. Those that do not are, by the same token, called non-conforming loans.
Government National Mortgage Association
GNMA, or Ginnie Mae, is a division of the Department of Housing and Urban Development. Its purpose is to administer special assistance programs and to help Fannie Mae in its secondary market activities. Specifically, GNMA
- guarantees payment on FNMA high-risk, low-yield mortgages and absorbs the difference in yield between the mortgages and market rates
- guarantees privately generated securities backed by pools of VA-and FHA-guaranteed loans
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, is a government-sponsored enterprise, originally chartered as a corporation in 1970. As a secondary market player, FHLMC buys mortgages and pools them, selling bonds backed by the mortgages in the open market. Freddie Mac guarantees performance on FHLMC mortgages.
A federal conservator, the Federal Housing Finance Authority (FHFA), now operates Fannie Mae and Freddie Mac as conservator with the U.S. Treasury a majority owner of both organizations.
