Secondary Market Mortgages
Secondary market mortgages provide a way for a lender to sell a home loan. It also permits investment in real estate loans without the need for loan origination and servicing facilities.
Although apparently remote to real estate buyers, sellers, and agents alike, the secondary mortgage market plays an important role in getting money from those who want to lend to those who want to borrow. In other words think of the secondary mortgage market as a pipeline for home loan money.
Federal National Mortgage Association
The best known secondary mortgage market operation in the United States is run by the Federal National Mortgage Association (FNMA), fondly known in the real estate business as Fannie Mae. Originally organized by the federal government and later converted to a part public, part private corporation, Fannie Mae buys and sells FHA, VA, and conventional mortgage home loans. Purchases are made, usually every 2 weeks, by inviting mortgage holders to offer their loans for sale to the FNMA. Funds for FNMA purchases come from the issue of corporate stock (which is currently traded on the New York Stock Exchange) and the sale of FNMA bonds and notes. Funds are also generated by selling FNMA loan holdings to insurance companies, pension funds, savings associations, and other mortgage investors on a competitive basis. Whether FNMA holds a loan or resells it, the actual month-to-month servicing remains with the home loan originator.
FNMA currently holds in excess of $49 billion of FHA and VA home loans and $45 billion of conventional home loans. This is about 5% of the total residential mortgage debt in the nation. By purchasing mortgage home loans from lenders, FNMA provides lenders with more money to make more home loans. This is an invaluable aid to the real estate industry, especially during periods of tight money.
In 1980, FNMA added two important financing programs: a home-seller loan program and a home refinance program. The home-seller program is actually a purchase money first mortgage accepted by a home seller. The loan is originated by an FNMA-approved lender using standard FNMA loan qualification procedures. The mortgage may then be kept by the home seller as an investment, or it may be sold to the FNMA-approved lender for possible resale to FNMA. The home refinance program permits any creditworthy buyer or owner of any home on which FNMA holds the mortgage to obtain a new conventional FNMA loan that reflects the property's current value. Existing FHA, VA, and conventional mortgages held by FNMA are eligible for the program.
Government National Mortgage Association
Known as Ginnie Mae, the Government National Mortgage Association (GNMA) was split off from FNMA in 1968 and established as a part of the U.S. Department of Housing and Urban Development (HUD). GNMA is known for its Tandem Plan and mortgage-backed securities program. Both of these are secondary market operations.
The Tandem Plan is a United States Government subsidy program whereby GNMA is authorized to purchase both federally insured and conventional mortgages at below-market interest rates in order to stimulate housing production in areas with special housing needs. These mortgages are then resold at current market prices with the government absorbing the loss as a subsidy. For example, a real estate home loan made at an interest rate two percent below the market is attractive to a borrower but is not attractive to a lender. But, under the Tandem Plan, GNMA agrees to buy such a mortgage from the lender at full value, then resell it on the open market at a price low enough to be attractive to investors. The discount on the sale is absorbed by GNMA. Because of its cost the Tandem Plan is being phased out and only previously made commitments are being honored.
Under its mortgage backed securities program, Ginnie Mae guarantees the timely payment of principal and interest to holders of securities issued by private lenders and backed by pools of HUD-insured and VA-guaranteed mortgages. The guarantee is backed by the full faith and credit of the United States Government. The mortgage pools are for similar types of property (for example, all single-family houses or all apartment buildings) at similar interest rates. Investors in these pools receive the monthly payments of principal and interest due on the mortgage loans in the pool regardless of whether or not they are collected from the borrowers. All prepayments and claims settlements are also passed through to the investors. This GNMA program has been very successful (currently over $150 billion in 70,000 pools) in attracting pension funds, trust funds, and individual investors to real estate lending.
Federal Home Loan Mortgage Corporation
The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, was established by an act of Congress in 1970 to provide a secondary market facility for savings and loan associations and other approved lenders. Freddie Mac has the authority to buy and sell FHA, VA, and conventional loans, enter into mortgage participations, and issue its own mortgage investment certificates. Under its loan purchase program (the whole loan program), the FHLMC will buy individual mortgages from banks and from savings and loan associations that meet FHLMC requirements as to loan application, appraisal methods, promissory note, and mortgage format. These loans are in turn packaged into lots of several million dollars each and resold to investors.
The FHLMC also markets participation certificates wherein an investor can purchase an undivided interest in a pool of mortgages rather than in individual loans. Designed to attract pension and trust fund money into home mortgages, these certificates are backed by residential mortgages held by Freddie Mac. Principal and interest are paid monthly. This program has been very successful in moving money from investors to borrowers. From time-to-time the FHLMC also markets a guaranteed mortgage certificate that pays interest semiannually to investors.
During the 1970 decade, the Federal Home Loan Mortgage Corporation focused on finding buyers for fixed-rate loans. However, by 1980, rapidly rising interest rates made fixed-rate loans increasingly unpopular with lenders and investors. In response, a pilot program was introduced in 1982 wherein Freddie Mac would buy adjustable rate mortgages and resell them to investors as whole loans or as participation certificates. This program, if successful, will go a long way toward keeping money flowing from investors to home buyers.
A by-product of buying and selling loans has been the tremendously influential role of the FHLMC in standardizing loan documents. Prior to 1970, nearly every bank and savings and loan association in the country used a slightly different loan application form, appraisal form, mortgage form, promissory note, and loan approval procedure for its conventional mortgage loans. Part of the task of creating a nationwide secondary market for conventional loans was to develop standardized forms. Today, when you walk into a bank or savings and loan or mortgage company and apply for a home loan, the loan application that you fill out will be the same FHLMC form wherever you go. Similarly, the appraisal form will be the same FHLMC form as will be the mortgage form, the promissory note, and the loan approval procedure.
MGIC Investment Corporation
In 1972, the MGIC Investment Corporation, originators of the Mortgage Guaranty Insurance Corporation, formed a buying and selling unit to provide the first nonfederal secondary market for conventional mortgages. Promptly nicknamed Maggie Mae, it provides an outlet where a lender can sell MGIC-insured mortgages to other investors. Maggie Mae accepts loans on consignment from sellers and turns them into a single mortgage-backed security. MGIC has also developed mortgage certificates whereby a number of different investors can participate in the same pool of mortgages. MGIC provides the standard mortgage guaranty coverage plus a policy on the mortgage pool itself that guarantees the monthly pass-through of principal and interest to the investor. As with FNMA, GNMA, and FHLMC, the purpose is to attract investors who might not otherwise invest in mortgage loans.
Secondary Market To Mortgage Money