What is the Secondary Mortgage Market and How Does It Work?

Article Summary:

The secondary mortgage market encourages the buying and selling of home loans. After a borrower purchases a mortgage, the mortgage lender then sells that mortgage to a government-sponsored enterprise, which then sells the mortgage to an investor. This process not only maintains money movement but also allows homeownership to be more affordable.

Most people don’t know this, but the vast majority of mortgage loans in the United States are not owned by the lenders that issued them. In most cases, mortgages are securitized in the form of agency mortgage backed securities (MBS). The principal and interest payments on these securities are passed through to investors and are guaranteed by the government-sponsored enterprises (GSEs)  Fannie Mae or Freddie Mac or by the government organization Ginnie Mae.

Even though it was founded 90 years ago, the secondary market remains a mystery to many people. In this article, we discuss the secondary mortgage market, how it works, who contributes and participates, and how it helps makes homeownership more affordable.

What is the secondary mortgage market?

The secondary mortgage market works basically as a space for lenders and investors to purchase and sell mortgages and their respective servicing rights. It was created in the 1930s to stabilize the housing market. To do this, Congress created the secondary marketplace, which reduced the barriers to homeownership by providing additional mortgage availability.

Though first established to resolve differences in regional pricing, the secondary mortgage market now redistributes available mortgage funds. In addition to fund redistribution, this market also promotes mortgage and capital markets to investors beyond the mortgage community.

The secondary market works when recently purchased mortgages become investor resources. By selling mortgage loans to other investors, the original lenders have more funds to support future loans.

Fun Fact! Though the secondary mortgage market isn’t involved in subprime mortgages, it did play a small role in the subprime mortgage crisis of 2008. However, this is largely because buying and selling mortgage loans on secondary markets is a large part of investment banking. It’s also important to recognize that multiple financial institutions were heavily involved in the financial crisis.

What’s the difference between the primary and secondary mortgage markets?

The primary mortgage market is where future homeowners buy mortgages. Rather than selling loans to other investors, the homeowner directly purchases a mortgage from a mortgage lender. The secondary market is where lenders go if they want to sell your mortgage to other investors and lenders.

How does this market work?

Let’s look at the secondary mortgage market through first-time homebuyer Jane Doe’s experience.

Step 1:Jane decides to purchase a mortgage for her home. After closing on the mortgage, Jane’s lender debates whether to keep the mortgage or sell it.
Step 2:Jane’s lender doesn’t want to risk losing money on the mortgage deal, and the lender sells her mortgage to another investor.
Step 3:Government-sponsored enterprises (GSEs), such as Freddie Mac or Fannie Mae, decide to purchase the mortgage. To make this worthwhile, the GSE purchases many loans from a series of lenders.
Step 4:The GSE then combines the mortgages into mortgage-backed securities. These mortgage-backed securities are then sold to multiple investors, which the GSE does through shares.
Step 5:When Jane makes mortgage loan payments to her lender, those payments go to the investor that purchased her mortgage. Since mortgages build interest, the investor then makes money from Jane’s mortgage payments.

Is the FHA a secondary market?

No. The Federal Housing Administration (FHA) is not a secondary market itself. However, just as Fannie Mae and Freddie Mac are buyers, so is the FHA. In short, the FHA’s role in the market is as a buyer, not a separate or parallel market.

Who participates in the secondary mortgage market?

As you’ve seen through the above example, the market involves several groups of investors and lenders.

Mortgage originators

First, there’s the mortgage originator, who can be an agency or an agency representative. Any institution that provides lending services can be a mortgage originator. Mortgage originators can also serve as bankers or brokers, or as intermediaries between potential homebuyers and underwriters.

Though you may think mortgage lenders are limited to only larger banks, this is not the case. You can also receive home loans from any financial institution where lending services are provided, such as government agencies or credit unions.

If you’re having trouble finding the right home loan for your situation, you can check out SuperMoney’s reviews on a wide variety of home loans below!

Government-sponsored enterprises

Once the mortgage originator decides to sell the home loan, the government-sponsored enterprise enters the picture since they’re the ones snapping up these secondary mortgages. Two examples of GSEs include Fannie Mae and Freddie Mac. These organizations act as go-betweens for borrowers seeking funds in housing and agriculture.


After the GSE purchases a mortgage (along with several others), the mortgages are packaged together to become mortgage-backed securities. GSEs buy bundles of mortgage-backed securities and drive value rates for underlying loans. However, they also serve as individual investors.

Investors want to generate revenue from higher interest rates (also known as interest income) or to add variety to their portfolios. Investors can be GSEs, private investors, hedge funds, and international agencies.

What are the pros and cons of the secondary mortgage market?

Like every other financial subset, the secondary mortgage market has its pros and cons.


Here is a list of the benefits and drawbacks to consider.

  • Lower mortgage rates overall
  • Identical interest rates in comparison to the primary market
  • Improved likelihood of refinancing
  • Long-term mortgage loan lifespan
  • Improved access to homeownership by reducing the number of barriers
  • Navigating the secondary market may be difficult for most borrowers
  • Prices within the market change frequently, and this information may not always reach the borrower
  • Fewer options concerning loan servicers

Why does this market exist?

The secondary mortgage market ultimately benefits every entity in some way. Not only does it provide more people (even someone with a low credit score) the opportunity for homeownership, but also the secondary market drives money movement. This, in turn, generates considerable profit for GSEs and investors while allowing banks and other lenders to offer additional loans.

Without this cycle, home loans would be prohibitively expensive and prevent many Americans from owning homes.

Key Takeaways

  • The secondary mortgage market is a marketplace for banks and lenders to sell loans.
  • Investors purchase loans, which offsets potential costs for banks and maintains revenue movement.
  • Primary mortgage markets are where borrowers purchase mortgages.
  • Multiple players contribute to the secondary market, starting with originators, GSEs, investors, and homeowners.
  • Despite the complexity, the secondary mortgage market makes homeownership more attainable for many Americans.

Find Your Perfect Mortgage Match

If you’re inspired to start looking for an affordable home loan, look right here! SuperMoney does the market research for you and provides detailed reviews and comparisons between popular mortgage lenders. Find your ideal home loan today!

Article Sources
  1. Best Mortgage Lenders | February 2022 — SuperMoney
  2. Best Mortgage Lenders for First-Time Homebuyers | February 2022 — SuperMoney
  3. What is a Qualified Mortgage? — SuperMoney
  4. What is a Subprime Mortgage? — SuperMoney
  5. What is a Balloon Mortgage? — SuperMoney
  6. The Secondary Market in Residential Mortgages — U.S. Department of Housing and Urban Development
  7. How the Secondary Mortgage Market Works — FreddieMac.com