Secondary Mortgage Market
Members of the secondary mortgage market are the businesses and organizations that buy loans from the originators. Think of them as kind of a clearinghouse for loans. They assemble the loans into even larger groups than the groups they bought from originators and then turn them into securities that can be sold on the stock market.
There's always been a secondary market, but before the 1950s it was less organized. Sometimes there were buyers that originators could sell loans to, but sometimes there weren't. Sometimes there were plenty of secondary market buyers in one area of the country but not in another. The result was a poor cash flow for originating lenders, which resulted in fewer loans to homebuyers.
The government stepped in to better organize the secondary market, creating agencies and the funding they required to keep the flow of money going back to originators so the originators could make more loans. Businesses and organizations purchasing the securities that have been assembled on the secondary market include life insurance companies, real-estate investment trusts, and others looking for long-term investments.
Major Players
The major secondary market organizations are Fannie Mae, Freddie Mac, and Ginnie Mae. Others include Farmer Mac, Munie Mae, and private Real Estate Mortgage Investment Conduits (REMICs). They all have slightly different purposes, as explained here.
Fannie Mae
Formerly a government agency called the Federal National Mortgage Association, Fannie Mae is now a corporation. Fannie Mae plays an important part in the development of the guidelines lenders use to determine if buyers qualify for a loan. Even though it is no longer a government agency, Fannie Mae is regulated by the U.S. Department of Housing and Urban Development (HUD). It can borrow funds from the U.S. Treasury, if necessary, to help keep funds flowing back to primary market lenders.
Ginnie Mae
The Government National Mortgage Association, commonly called Ginnie Mae, was created when Fannie Mae became a private corporation. Regulated by HUD, Ginnie Mae provides a secondary market for low-income and other special-assistance loans and guarantees that principal and interest payments will be made to investors who buy mortgage-backed securities.
Even though you'll never deal directly with the agencies and corporations involved in the secondary market, knowing they exist and understanding how they work makes you more familiar with the mortgage market in general and may give you a better appreciation of the tools that are in place to help buyers in every income category acquire a home.
Freddie Mac
This private corporation was formerly a government agency called the Federal Home Loan Mortgage Corporation. It was originally created to provide a secondary market for savings-and-loan associations, but Freddie Mac is now involved in buying and selling a variety of loans on the secondary market.
Other Major Secondary Players
Three other members of the secondary mortgage market are Real Estate Mortgage Investment Conduit, REMICs, which issue mortgage-backed securities; Farmer Mac, which is involved with the secondary-market sale of loans for farms and ranches; and Munie Mac, which handles tax-exempt multifamily developments.
