The Primary Market
The primary market consists of mortgage loan originators, the community of banks,
lenders, credit unions, saving and loans (virtually any lending institution willing
to originate and underwrite a mortgage). In fact, the secondary market uses the
term "originator" to refer to the original lender.
Most lenders make loans with the understanding they may sell those loans to the
secondary market (see below).
Why would a lender sell your loan after all the trouble you've both gone through
to get it in the first place? Two reasons. First, the lender wants to free up
the money it has invested in your mortgage to make additional loans (which may
in turn be sold again to the secondary market).
The Secondary Market
The secondary market comprises of insurance companies, pension funds, banks, securities
dealers, thrifts and government-sponsored enterprises such as Fannie Mae and Freddie
Mac. These organizations invest in mortgages made by lenders in the primary market.
The loan you negotiate (especially fixed rate loans) will probably be sold into
what is known as the "secondary market."
The secondary market won't change your mortgage. But it may change where you pay
and who receives your money. The reason - the financial community views a mortgage
as an asset. And like any asset, it can be bought and sold. More than likely,
your mortgage will be sold to another party (perhaps more than once during the
life of the loan). Regardless of who "buys" your loan, both you and that buyer
are bound by the terms you negotiate with the original lender.
Fannie Mae and Freddie Mac, Who and What Are They?
Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (Federal
Home Loan Mortgage Corporation) are large, quasi government charted corporations
with significant influence in the mortgage industry. Technically, Fannie Mae and
Freddie Mac are "government sponsored enterprises." They are publicly traded (you
can buy stock in either organization), profit oriented, and responsible to their
shareholders; but Congress retains some control over their operations.
How influential are Fannie Mae and Freddie Mac? Together, they buy approximately
half of the family home mortgages originated each year. The two organizations
compete directly and follow very similar business plans. Fannie Mae is the largest
corporation in America in terms of assets. This economic clout enables the pair
to influence the mortgage market nationwide (generally in favor of the home buyer)
in the following ways:
- Allowing lenders in the primary market to originate new loans by purchasing mortgages made according to conforming guidelines.
- Helping lessen regional differences in interest rates nationwide by encouraging investment in areas with high interest rates, which promotes competition among lenders (pushing interest rates down)
- Providing a bridge between capital markets and the mortgage market, increasing the availability of mortgage dollars.