Secondary Mortgage Market
Definition§
The secondary mortgage market allows financial institutions to buy and sell mortgages, primarily focusing on residential first mortgages. It helps improve liquidity and manage risk by enabling institutions to transfer mortgage debt to other investors. Unlike a central trading floor, the secondary mortgage market operates through various channels, with frequent auctions conducted by institutions such as the Federal National Mortgage Association (FNMA) and Freddie Mac, which buy the highest-rated mortgages offered at the most effective rates.
Examples§
-
Good Money Mortgage Bankers: Suppose this institution originates 100 residential first mortgages with a total face value of $5 million. They sell these mortgages on the secondary mortgage market, earning a $1,000 profit on each.
-
Blue Sky Lending: A local bank originates $10 million worth of home loans. By selling these loans in the secondary market to FNMA, they can free up capital to issue new loans, thereby continuing their business operations without facing liquidity constraints.
Frequently Asked Questions (FAQs)§
What is the primary purpose of the secondary mortgage market?§
The primary purpose of the secondary mortgage market is to increase the liquidity of mortgage funds, allowing lenders to recycle funds into new mortgage originations.
How do FNMA and Freddie Mac participate in the secondary mortgage market?§
FNMA (Fannie Mae) and Freddie Mac buy mortgages from lenders, bundling them into securities that are sold to investors. Their involvement helps provide liquidity, stability, and affordability in the housing market.
Is the secondary mortgage market only for residential mortgages?§
Primarily, the secondary mortgage market deals with residential mortgages, but certain aspects can involve commercial mortgages as well, although to a lesser extent.
How does selling mortgages on the secondary market benefit lenders?§
By selling mortgages on the secondary market, lenders can free up capital, manage risk better, and maintain more stable portfolios, enabling them to offer more loans to consumers.
Related Terms§
Primary Mortgage Market:§
The market where borrowers and mortgage originators come together to negotiate terms and create new mortgages.
Mortgage-Backed Securities (MBS):§
Securities composed of a bundle of home loans bought from the banks that issued them. Investors purchase these securities to receive periodic payments similar to bond yields.
Liquidity:§
The availability of liquid assets to a market or company, which is crucial for the easy buying and selling of assets such as mortgages.
FNMA (Fannie Mae):§
Federal National Mortgage Association, a government-sponsored enterprise (GSE) that provides liquidity for the housing market by buying mortgages from lenders.
Freddie Mac:§
A government-sponsored enterprise (GSE) that buys mortgages from smaller banks to increase availability of funds and foster a stable housing environment.
Online Resources§
- Fannie Mae: Information on mortgage related programs and market operations.
- Freddie Mac: Resources and data on the secondary mortgage market.
- National Association of Realtors (NAR): Insights and articles on the impact of secondary markets on housing.
References§
- “The Secondary Mortgage Market: What It Is, And Why It Matters,” from Realtor.com.
- “Liquidity and Financial Markets,” by Wallace F. Love, annually updated.
Suggested Books for Further Studies§
- Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques by Frank J. Fabozzi
- Secondary Markets of Private Debt and Mortgage Instruments by Solomon Jason
- Fixed-Income Securities: Valuation, Risk, and Risk Management by Pietro Veronesi
