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The Secondary Mortgage Market

STUDY SHEET

Top Takeaways
You can expect to see several questions related to the secondary mortgage market
on your licensing exam.
• Nonconforming loans are those that do not
The Secondary Market meet all the underwriting standards of
The Secondary Mortgage Market Process Fannie Mae or Freddie Mac.
Secondary market players purchase loans from Qualified Mortgage
primary lenders and package and sell them as • Meets certain lending standards.
mortgage-backed securities to investors. The
• Doesn’t include risky features (like balloon
money received is then used to purchase
payments, terms longer than 30 years, etc.).
additional loans.
• Borrower’s ability to repay has been
• Makes the primary market possible by giving assessed.
primary lenders a place to sell their loans to
obtain funds to make new loans. Government-Sponsored Enterprises (GSEs)
• Fannie Mae – buys conforming loans,
• Made up of Fannie Mae, Freddie Mac, and
packages and sells into MBSs, sells shares of
investors in mortgage-backed securities
MBSs.
(MBSs).
• Freddie Mac – buys conforming loans
Collateralized Mortgage Obligations (CMOs) (mostly from thrifts), packages and sells into
• Security made up of mortgages and/or MBSs, sells shares of MBSs.
mortgage-backed securities and organized
• Federal Home Loan Bank (FHLB) – advances
into tranches (security classes).
funds to member banks in exchange for
• Played a role in the 2007 financial crisis. collateral (usually mortgages).

Government-Sponsored Enterprises (GSEs) Non-Government-Sponsored Enterprises (Non-
• Private companies such as Fannie Mae, GSEs)
Freddie Mac, Farmer Mac, and the Federal • Ginnie Mae
Home Loan Bank that were created by the
o Guarantees MBSs that only contain loans
U.S. Congress to make borrowing easier and
insured or guaranteed by a U.S.
more cost effective.
government agency, which are issued by
• Commonly, GSEs serve homeowners, private institutions.
farmers, and students.
o Does not buy mortgages.
• Farmer Mac buys agricultural loans and
o Does not issue MBSs.
loans from rural lenders, and issues MBSs.

Federal Housing Finance Agency (FHFA)
• Oversees Fannie Mae and Freddie Mac and
regulates the Federal Home Loan Bank.
• Establishes limits on conforming loans (loans
that meet Fannie Mae and Freddie Mac
requirements).