12/27/2022
What is the secondary mortgage market?
The secondary mortgage market is where investors buy and sell packaged mortgages. Lenders originate loans and then place them for sale on the secondary market. Investors who purchase these loans have the right to collect the money owed.
Many loans are sold to the government-sponsored Fannie Mae and Freddie Mac, where they repackage the loans as mortgage-backed securities or hold them on their books – collecting interest. To be sold, the loans need to meet standards set, which include maximum loan amounts, downpayment, credit score, and other requirements.
When your local financial institution sells your mortgage on the secondary market, they typically remain as the loan servicer. They handle the day-to-day tasks of managing your loan, which include processing your payments, responding to inquiries, and keeping track of principal and interest paid. In return, the loan servicer collects a servicing fee, usually between 0.25% to 0.5% of the mortgage balance.
What is the purpose?
The secondary mortgage market was created in 1938 with the formation of Fannie Mae. Fannie Mae provided liquidity for originating lenders by purchasing loans off their books. In turn, banks do not have as much money tied up, are able to generate more loans, and therefore encourage homeownership.
As an investor, if your commercial loan was sold on the secondary mortgage to a government-backed company (Fannie Mae or Freddie Mac), it could have been considered a covered property. The CARES Act restricted lessors of covered properties from filing new eviction actions for non-payment of rent. Be sure if your loan will be sold on the secondary market and its implications before doing so.
