What is the Secondary Mortgage Market?

Tara Mastroeni
Published: March 10, 2020 | Updated: January 28, 2023

Understanding the secondary market for real estate is crucial for new would-be-buyers and investors alike. With that in mind, below is an answer to the fundamental question “What is the secondary mortgage market?” Keep reading to learn how the secondary mortgage market works, who the major players are in recycling capital, and how you, as the consumer, can be affected by market fluctuations.

secondary mortgage market

Key takeaways

By the end of this article, you will know that:

  1. A secondary mortgage market is a marketplace where existing mortgages are bought and sold by investors who are not the originators or the payers of these mortgages.
  2. The secondary market allows mortgage lenders to sell their notes quickly, giving them cash to issue further loans. This means greater availability of mortgages for buyers.
  3. Government-sponsored agencies like Fannie Mae and Freddie Mac, along with banks, loan acquisition firms and investors are the largest participants in the secondary market.

What is the secondary mortgage market?

To start, even though lenders issue mortgages to homeowners, they rarely keep the debt in-house. Instead, the loans are sold off shortly after closing to loan aggregators like Fannie Mae and Freddie Mac or a private institution like Amerinote Xchange. The lenders are paid in exchange for those loans and they use those funds to provide mortgages to further borrowers.

Once the loan aggregators buy the loans, they bundle them with other mortgages that have a similar risk level. Those bundles are known as mortgage-backed securities (MBS). The mortgage-backed securities are then sold in the market to investors like governments, pension funds, insurance companies and hedge funds.

While the main focus here will be the secondary loan market, it’s worth noting that other types of debt are also sold in secondary markets as well. Auto loans, credit card debt, and student loan debt are all packaged and sold in this way. In particular, so are U.S. Treasury bills, bonds, and notes, which have an effect on all interest rates.

Who are the major participants in the secondary mortgage market?

To get a more in-depth understanding of how secondary marketing works, it’s important to take a look at the major participants in this cycle, as well as the role that each one plays in moving capital:


Before the mortgage secondary market was established, banks had to wait a long time before they were repaid for a mortgage, typically 15 to 30 years. This meant that fewer financial institutions had enough capital to write mortgage loans, and as a result, potential homebuyers had a harder time finding mortgage lenders.

Today, selling mortgage loans allows banks to recoup the cost of lending and to use the proceeds to fund new loans. This increases the amount of capital available for lending, making it easier for borrowers to find the money they need.

Government-sponsored enterprises (GSEs)

Fannie Mae was originally created by Congress in 1938 to bring liquidity and affordability to the mortgage market. However, in order to more successfully fund these efforts, the government privatized the agency with the passage of the Federal National Mortgage Association Charter Act in 1968. It also did the same with Freddie Mac once the agency was created in 1970.

Now that they are privatized, these agencies bundle home loans into mortgage-backed securities, which are then sold. By packaging these mortgage-backed securities — and guaranteeing the timely payment of their principal and interest — these agencies are able to attract investors and expand the pool of funds available for housing.

Private mortgage note acquisition firms

Beyond Fannie Mae and Freddie Mac, there are many private loan acquisition firms that perform the same role as loan aggregators. Fannie Mae and Freddie Mac have strict standards for the loans that they will buy. Private firms can and do buy the Fannie and Freddie “fallouts,” as they are called. This means loans that don’t fit Fannie and Freddie’s purchase criteria.

However, private mortgage note buyers are able to assume a greater level of risk. They are able to help lenders exit their investments on both conforming and non-conforming loans in order to recycle their capital in an expedient way.


The last group of participants in this cycle are the investors. For their part, investors can buy into mortgage-backed securities in a few different ways:

Pass-through securities

With pass-through securities, the investors receive a share of all the principal and interest payments received by their pool of mortgage loans as the borrowers make payments to the issuers. Each mortgage pool typically has a five-to-30 year maturity, but there is a certain amount of risk involved because some mortgages will be paid off early.

Collateralized Mortgage Obligation (CMO)

Collateralized mortgage obligations aim to minimize that prepayment risk by grouping mortgages into several tranches based on their risk levels. The tranches are then sold similarly to shares. Since each tranche has a different maturity date and size, bonds with monthly coupons are issued against them. The coupons entitle their holders to monthly principal and interest rate payments.

Stripped mortgage securities

With stripped mortgage securities, investors are paid either the principal or the interest on the loan. The market value of a principal-only stripe can vary widely based on interest rates. Whereas, an interest-only stripe strictly pays interest based on the outstanding principal amount of the loan. As mortgages amortize and prepayments are made, the value of an interest-only strip declines.

secondary mortgage market

How does the secondary mortgage market affect consumers?

When private investors bring mortgage loans into the secondary market, competition and risk become much bigger factors. If you have a lower credit score, for example, the lender will perceive lending to you as a greater risk than lending to someone who has a higher score. As a result, you will likely be charged higher rates and fees in order to attract investors.

In fact, depending on the strength of your financial profile, you may not be able to get a mortgage through traditional means at all. In the wake of the 2008 recession, Fannie Mae and Freddie Mac tightened their lending standards more than ever before, boxing some would-be-home-buyers out entirely.

In light of that, many Americans have turned to seller-backed financing that offers looser qualifying requirements. However, since many private lenders don’t want to wait 15 to 30 years to see returns, they end up selling mortgage notes to private buyers, who then package the notes for the secondary markets.

secondary mortgage market

The bottom line

At its core, the answer to the question “what is the secondary mortgage market?” is simple. The secondary market for mortgages allows more Americans to become homeowners. By giving lenders the opportunity to sell their existing loans, it provides them with the liquidity they need to keep lending.

However, not all loans can reach secondary markets through traditional channels. In those cases, private lending can provide an effective solution.

If you are thinking about using seller-financing or private lending to accomplish your goals, contact us to see how we can help.

Frequently Asked Questions

What happens in a secondary mortgage market?

In a secondary mortgage market, the originator of a loan (the lender) sells on the rights to that loan to an intermediary, such as Fannie Mae or Freddie Mac, or a loan acquisitions company, which then bundle these loans according to level of risk and sell these bundles on to investors.

How do investors make money in the secondary mortgage market?

In the most general terms, investors make money in the secondary mortgage market through the spread (difference) between what they paid for the note, and what the note pays out in principal and interest over time.

Who regulates the secondary mortgage market?

In the U.S., the Federal Housing Finance Agency (FHFA) regulates the activities of Fannie Mae and Freddie Mac, as well as the banks that are part of the Federal Home Loan Bank (FHLB) System, which provides a steady stream of capital to mortgage lenders. The Consumer Financial Protection Bureau (CFPB), created in the wake of the 2008 foreclosure crisis, is responsible for enforcing rules against unfair, deceptive or abusive behavior by mortgage lenders.

DISCLAIMER: This is not an offer to sell securities. Any person, entity, or organization must first be qualified by the company and read all the offering documents and attest to reading and fully understanding such documents. Amerinote Xchange and its affiliates are not licensed securities dealers or brokers and as such, do not hold themselves to be. This presentation should be construed as informational and not as an advertisement soliciting for any particular purpose. All securities herein discussed have not been registered or approved by any securities regulatory agency in accordance with the Securities Act of 1933 or any state securities laws.