The primary and secondary mortgage markets

Mortgage money moves through two markets. Knowing which is which, and what each of the three "Maes and Macs" does, is a reliable exam topic.

The primary market

The primary mortgage market is where loans are made. A borrower applies to a lender, the lender underwrites the loan, and the lender funds it at closing. Primary market lenders include banks, credit unions, savings associations and mortgage companies. The company that collects payments afterward is the servicer; it may or may not be the original lender.

A lender that kept every loan it made would soon run out of money to lend. That is the problem the secondary market solves.

The secondary market

In the secondary mortgage market, existing loans are bought and sold. Buyers purchase loans from lenders, usually bundle them into mortgage-backed securities (MBS) and sell those securities to investors. The lender gets its cash back and can make new loans. This flow of cash back to lenders is called liquidity.

Borrowers never deal with the secondary market directly. Their loan may be sold, but the terms of the note do not change.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are the two big buyers of conventional loans.

• Fannie Mae says it buys mortgages from lenders and bundles them into MBS sold to investors, so lenders can use the replenished cash to offer new mortgages.
• Freddie Mac was chartered by Congress in 1970. It buys loans from lenders in the secondary market and, in most cases, packages them into securities. It says plainly that it does not originate loans or lend money directly to borrowers.

Neither one makes loans to home buyers. The loans they buy must meet their standards, including the conforming loan limit set with their regulator, the Federal Housing Finance Agency (FHFA). That is why a loan within those standards is called "conforming."

Ginnie Mae

The Government National Mortgage Association (Ginnie Mae) is a wholly owned corporation of HUD. Its role is a guaranty, not a purchase:

• Under 12 U.S.C. 1721(g)(1), Ginnie Mae guarantees the timely payment of principal and interest on securities backed by pools of mortgages insured or guaranteed under federal programs, including FHA-insured and VA-guaranteed loans and loans under Title V of the Housing Act of 1949 (the USDA rural housing programs).
• The securities are issued by approved issuers (lenders), not by Ginnie Mae.
• The statute pledges the full faith and credit of the United States to payments under the guaranty.

Memory aid: Ginnie = Government loans and a Guaranty.