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The Secondary Mortgage Market – Power Behind the Scenes As the housing market and the greater economy continue to tumble, many questions are being asked about the secondary mortgage market. What role does this misunderstood arena play, and how does it figure into today’s crisis?
This is the part that may confuse even the most astute readers of real estate and economic events. Primary lenders sell loans in the secondary market, and use the proceeds of the sale to make new loans to other homebuyers. Who buys loans in the secondary market? Organizations like Freddie Mac and Fannie Mae (created in 1938 by the federal government to establish the secondary market) are key in this area. But other private mortgage companies are also players. Once the loans are sold in the secondary market, the buyers package these loans into mortgage-backed securities. The securities are then sold to investors on Wall Street. When Freddie Mac and Fannie Mae do this, they guarantee timely payment of principal and interest to the investors who invest in these pools. When other players do this, packaged loans are often called collateralized mortgage obligations (CDOs). Mortgage backed securities are attractive to many investors, especially large-scale institutional investors such as pension funds or mutual funds. About half of all new single-family mortgages originated today are funded in the secondary mortgage market. The secondary mortgage market plays an important role in the housing and lending market:
So what about today’s crisis? Problems began with the over issuance of subprime loans. This year, and in the past few months in particular, many homeowners with these loans felt the sting of reset rates and payments. Defaults and foreclosures spiked. Suddenly, these mortgage-backed securities were not the bastion of safety and steady returns they once were. With investors staying away, the whole process of the secondary mortgage market stalled, meaning less money available for loans.
Follow the link to continue reading this article. Government-Sponsored Enterprises: Fannie Mae and Freddie Mac Today, Part 1 Government-Sponsored Enterprises: Fannie Mae and Freddie Mac Today, Part 2 Fannie Mae’s Work to House America Fannie-Freddie Bailout: What it Means for Taxpayers & Consumers
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