By Paul Barretto
What is the Secondary Mortgage Market?
Have you ever wondered how home lending works? Most of us are familiar with going to our local bank, credit union, or financial institution to take out a loan to buy or refinance our home but have you ever thought about how your lender goes about providing you the funds? When you finance your home, you and your lender are doing business in what’s considered the primary mortgage market.
The secondary mortgage market is where banks, credit unions, other financial institutions, and investors trade their mortgages, servicing rights, and mortgage-backed securities. Most lenders sell their mortgages to raise money to run their lending business. The secondary market defines how we get a mortgage loan, the interest rates and loan terms, and standards we must meet.
The Secondary Mortgage Market Makes American Housing
In the early 1900s, loans to buy a home were 3- or 5-year adjustable-rate balloon mortgages, which meant you paid interest for those first three to five years and then paid the full amount of the loan. Your options were either pay your lender for the remaining loan amount in cash or refinance your home into another balloon mortgage. In those days all of lending was local, meaning the interest rates, loan terms, and source of money was specific to where you lived.
When our country went through the Great Depression, nearly one in four homeowners lost their homes to foreclosure as they couldn’t pay for their mortgage loans without a job. Lenders stopped offering mortgage loans as they didn’t have any money to lend. This created a national housing crisis and had a damaging effect on the economy. In 1938, Congress created the secondary mortgage market when they formed the Federal National Mortgage Association, also known as Fannie Mae. Its sole purpose was to buy mortgage loans from the Federal Housing Administration and the Veterans Administration (VA). This allowed lenders to offer mortgage loans to their borrowers regardless of the economic environment, make money, and pass the risk of non-payment to Fannie Mae. This arrangement created a reliable, steady source of funding for housing and introduced long-term fixed-rate mortgage loans, national interest rates, and affordable housing programs.
In 1968, Congress converted Fannie Mae to a privately-owned, government-chartered corporation limiting its purchase of mortgage loans to conventional mortgages, FHA and VA loans. It also created the Government National Mortgage Association (Ginnie Mae) as a government agency that buys mortgage loans from other government agencies such as FHA, VA and USDA/Rural Development. In 1970, the Federal Home Loan Corporation (Freddie Mac) was created to buy conventional, FHA and VA loans like Fannie Mae to boost competition in the secondary mortgage market. Today, Fannie Mae and Freddie Mac are the largest buyers of conventional mortgage loans, which can be as high as $548,250 for a single-family home in 2021. The loan limits can change annually.
In 2008, we experienced the Great Recession which was our generation’s version of the Great Depression. While the housing industry suffered greatly, our nation managed through it because of the secondary mortgage market’s ability to serve the U.S. housing market. The secondary mortgage market was also instrumental in the recovery of the U.S. economy thanks to the mortgage-backed security.
It’s All About Mortgage-Backed Securities (MBS)
A major innovation that transformed the secondary mortgage market in the United States also happened in 1968 with the creation of the residential mortgage-backed security or MBS. An MBS is a bond made up of home loans. What makes MBS an important part of the secondary mortgage market and the U.S. housing market is the ability to offer investors a guaranteed payment of principal and interest throughout the term of the bond. The consistent, predictable, payment and uniformity of the loans backed by housing in the U.S. is guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac. In 2020, Ginnie Mae issued $450 Billion in MBS, and Fannie Mae and Freddie Mac issued $3.3 Trillion in MBS.
While creating access to mortgage loans despite the economic environment is the purpose of the secondary mortgage market, the Federal Reserve, or “the Fed”, uses MBS as a tool for economic recovery. By purchasing MBS in large quantities, they can keep mortgage interest rates very low. For example, 30-year fixed-rate loans remain below 3%. Buying MBS and other bonds to keep borrowing rates for housing and other loans was a key part of the Quantitative Easing strategy used to help our country recover from the Great Recession. In March 2020, the Fed began buying MBS again to support the economy through the COVID-19 pandemic.
Making Manufactured Housing Great Again Through The Secondary Mortgage Market
As the consumer market begins to understand the value of today’s manufactured homes, the opportunity and potential for manufactured housing is unprecedented because of the growing housing gap in our country. Traditional site-built home construction is not the answer as manufactured housing is more efficient and scalable in its ability to produce quality homes with less waste and at a more affordable price. The U.S. secondary mortgage market gives the manufactured housing industry the ability to scale its growth. Ginnie Mae, Fannie Mae, and Freddie Mac have no limits on the amount of loans they can buy, and they want to buy as much as they can. They are working with the industry to have more of their lenders sell them manufactured home loans.
However, to take advantage of this opportunity, the manufactured housing industry needs to evolve and transform by growing its land and home, or real property business attracting the homebuying population priced out of new and existing site-built homes. While we are already seeing innovative approaches to expand the market, such as retailers and lenders partnering with developers and city planners to build and expand subdivisions, there’s still a long way to go.
Paul Barretto is the Executive Director for LearnMH where he is responsible for the organization’s growth and strategic development as a resource for positive change in the offsite factory-built housing industry. He is recognized as an influencer in factory-built housing and authored Fannie Mae’s first Manufactured Housing market plan for the Duty to Serve.