Sold to the Secondary Market

Non-conforming loans such as jumbo programs are usually sold to the secondary mortgage market in much the same way as conforming loans are sold through Fannie Mae and Freddie Mac.

Instead, it is usually private financial institutions who purchase from lenders across the nation those non-conforming loans that meet each institution's guidelines. That private company then packages multi-million dollar blocks of loans into securities, which are then sold to investors on Wall Street and the financial markets.

Wall Street and the financial markets to which these securitized mortgages are sold is called the secondary mortgage market. By comparison, the primary mortgage market involves lenders and borrowers.

By connecting the residential mortgage market with the broader, more powerful financial market, home buyers receive an increased supply of loan funds. Without this connection into the secondary mortgage market, banks will have a more limited supply of mortgage funds. Again, this abundant supply means relatively lower pricing or interest rates.

Through this process, private financial corporations mimic federally chartered agencies, such as Fannie Mae, to reduce the lender's risk exposure. If one borrower defaults, the losses are diffused among all the parties. For the Wall Street investors who buy such mortgage securities, they do not bet on a single loan; instead they bet on a piece of thousands of loans (used to create this block of mortgage securities).

Before the advent of the secondary mortgage market, bank loans basically were limited to the deposits that the banks had in their institution. Once those deposits were all loaned out, the bank could not really lend any more funds. In such scenarios, banks were especially hesitant to lend funds to high-risk borrowers.

What You Need to Know About Real Estate

What You Need to Know About Real Estate

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