The primary mortgage market is the place where consumers shop for loans when they are ready to buy a home. The secondary mortgage market, on the other hand, is where banks sell loans to other investors like the federal government, pension funds, and insurance companies. Nearly every home loan ever issued in the US is eventually sold on the secondary market.
By selling loans to these secondary investors, banks are freed up to offer new mortgages. Before the secondary market was created, only large banks had the funds able to service a mortgage for the 15 or 30-year life of the loan. Opening up the secondary market allowed home buyers more options, helped to keep interest rates low and created a more competitive marketplace.
On the secondary market, loans are often sold to large aggregators like Fannie Mae and Freddie Mac, which are guaranteed and backed by the federal government. Those aggregators then package the loans into mortgage-backed securities that are sold to investors like governments, pension funds, hedge funds, insurance companies and Wall Street speculators.
The Current State of The Secondary Mortgage Market
If all of this sounds familiar, it should. The subprime mortgage crisis was at the epicenter of the Great Recession. The secondary market was decimated by the financial crash, and investors were scared away, but the market still exists. Banks began returning to the secondary market around 2013 and they currently hold around 27% of mortgages.
Even so, home ownership is now lower than it was in 1976, even with the government guaranteeing 90% of all home loans. The mortgage industry is still hobbling back to life, and many regulators and mortgage professionals disagree on the process by which the mortgage market can get back on track without creating another potential crash.
“There is a bubble of potential 1st time home owners out there! They will join the American dream and buy their 1st home because it’s an investment in their future! In the meantime, the place to find a job in the mortgage industry is in the secondary market. There are plenty of loans that need to be serviced and will need to be taken care of for many years to come!”
Lewis Ranieri, known as the “father of the mortgage-backed security” addressed the current state of the secondary market in a recent conversation with National Mortgage News. As one of the authors of a reform proposal to merge Fannie Mae and Freddie Mac and have them reinsure catastrophic risk only, he believes that government-backed securities are not encouraging competition, but rather stifling it. He says change is needed to free the market back up, but he and others like him are experiencing resistance:
With the GSEs and other government agencies like the Federal Housing Administration still involved in 90% of the mortgage market, any scaling back to the more traditional benchmark of around 60% for governmental entities to allow the re-introduction of more private market involvement will have to be gradual.
While both the primary and secondary mortgage markets haven’t recovered 100% from the recession, American families have not abandoned the dream of home ownership, and over time, investors will return to the secondary market to help banks free up capital to make new loans.
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