Secondary Mortgage Market
Definition
The secondary mortgage market is where existing mortgage loans are bought and sold between lenders, investors, and government-sponsored enterprises (GSEs) like Fannie Mae, Freddie Mac, and Ginnie Mae.
Example
A local bank originates a $300,000 conventional mortgage. The bank then sells the loan to Fannie Mae on the secondary market, receiving $300,000 in cash. The bank uses this cash to make a new mortgage loan to another borrower. The original borrower's payment now goes to investors who purchased the mortgage-backed security.
Exam Tip
Know the three main players: Fannie Mae (buys conventional), Freddie Mac (buys conventional), Ginnie Mae (guarantees FHA/VA). Remember that the secondary market provides LIQUIDITY—lenders sell loans to get cash for new loans. Ginnie Mae does NOT buy loans—it guarantees them. This is a common exam trick.
Related Financing Terms
Conventional Loan
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
VA Loan
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
Fixed-Rate Mortgage
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Secondary Mortgage Market and other financing concepts.