The terms primary and secondary market refer to loan markets in real estate. The primary market is where a loan originates. To be more specific, it refers to when a loan is established between a lender and homebuyer for the purchase of their home. This is called the primary market.
The term secondary market comes into play when we talk about the market where lenders and investors buy and sell mortgages and mortgage-backed securities. Essentially, lenders will originate loans with homebuyers and then resell them to other investors or investment institutions on the secondary market.
The secondary market was established after the market crash in 1929. Before then, buyers were required to have a minimum of 20 to 40 percent down payment – nearly underheard of in today’s day and age. In addition, loan terms were only up to 7 years, at which point if the homeowner hadn’t paid the balance, they would have to renegotiate their loan.
After the crash, in 1934, the US government introduced FHA-backed loans. FHA-backed loans’ primary purpose was to insure lenders against loss so that they didn’t view lending to parties from various economic backgrounds as too risky. This made it possible for more people to purchase a home and was the origination of the 30-year fixed loan.
However, because loans were now a 30-year term as opposed to 7, both the government and lenders knew there would be a greater chance for buyers to default. Hence, the government opted to insure these loans at the cost of an up-front insurance premium to buyers.
This created a new challenge. Previously, the lending body would receive the money and interest back quickly, usually within 7 years. They could then use those funds to establish new loans. But now, with 30-year loans, they were not getting repaid fast enough to establish new loans with more buyers. So, the government introduced the Federal National Mortgage Association, or Fannie Mae.
Fannie Mae was created to purchase FHA loans from lenders on the newly established secondary market. This simultaneously freed up lender’s funds to originate more loans with homebuyers and create a new investment asset with Fannie Mae stock. Loans that were sold on the secondary market had to meet Fannie Mae criteria.
Fannie Mae began to purchase these loans, package them, and then resell them as mortgage securities on the open market.
In 1968, Fannie Mae was split with the creation of the Government National Mortgage Association, commonly referred to as Ginnie Mae. This is a federally owned corporation by the Department of Housing and Urban Development.
Lastly, the Federal Home Loan Mortgage Corporation, aka Freddie Mac, was created which is a government-sponsored and publicly traded enterprise established in 1970 to further expand the secondary market.
Fannie Mae, Ginnie Mae, and Freddie Mac are all vital institutions that keep the secondary market moving so that the primary market can continue to establish loans with property buyers. But, most importantly, you should know that the secondary market is the resell market of loans secured by real property.
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