What is the secondary mortgage market and how does it work?

When you close on a house, the lender gives the money to buy or refinance your home. But most lenders are unable to or don’t wish to tie up their capital for up to 30 years for your payoff. The secondary mortgage market lets lenders get fast funding to make more loans. About 75% of 2024 mortgage originations were sold on the secondary market.

Primary vs. secondary mortgage market

When individuals buy or refinance their house, they do so on the primary mortgage market. This market consists of home buyers, homeowners and the mortgage lenders who serve them. Rocket Mortgage^® makes loans to clients on the primary mortgage market.

Rocket Mortgage is also a participant in the secondary mortgage market. To make future loans, we sell to major mortgage aggregators (also referred to as mortgage investors). They then package all of this into mortgage-backed securities which are bought by investors who want to make continued returns off your monthly payment.

The secondary mortgage market explained

The secondary mortgage market includes all transactions that take place with a mortgage after the client closes with their mortgage lender. The mortgage lender sells your loan or many loans to a mortgage aggregator. The aggregator packages similar loans into mortgage-backed securities (MBS) sold to investors.

Why do lenders sell mortgages?

Mortgage investors play a key role in the mortgage market by doing all the following:

• Help lenders offload risk: Selling the mortgage loan gets it off the balance sheet of the original lender.
• Give operational funding: The lender is able to use the money from the sale to make a new loan to someone else.
• Provide key liquidity: Lenders receive funds in a matter of months as opposed to waiting up to 30 years for your loan to fully pay off.

Why do investors buy mortgages?

We mentioned that investors routinely buy MBS. What’s the attraction? Let’s look:

• Steady income stream: As long as people keep making their mortgage payments, the money from the principal and interest rolls in on a regular basis. Moreover, for agency MBS, there’s an actual or implied government guarantee.
• Mortgages tend to be prioritized: Because your house is collateral for a mortgage, people tend to make this payment even if they get into financial trouble. Data from the New York Fed shows that mortgages have the lowest default rate among the major consumer loan types that also include credit cards and auto loans.

Does the secondary mortgage market put your mortgage at risk?

Once you close on your loan with your mortgage lender, the terms of that mortgage, including the interest rate and how long you have to pay it off, don’t change. This holds true even if the mortgage is sold. The primary relationship that clients have once the mortgage is originated is with the mortgage servicer.

Your mortgage servicer is the entity you make your payments to each month. This may be your original lender. Servicers get a small fee out of your monthly payment in exchange for passing along the principal and interest to investors. In some cases, your mortgage servicing is transferred. You’ll receive communication if this happens.

Mortgage investors do have certain standards for the loans they buy – minimum credit score, down payment, just to name a couple. Investors also track the default rate on loans and may not buy from lenders whose loans fail too often. These checks on the market encourage healthy and responsible lending.

Who are the major participants in the secondary mortgage market?

Let’s run quickly through the major participants in the secondary mortgage market. But before we get there, let’s touch on what homeowners need to know.

Homeowners

While homeowners have no direct participation in the secondary market, this doesn’t mean there’s no impact. There’s a high likelihood that your mortgage gets sold on the secondary market, but this has no effect on the terms of your loan or who you make your payment to.

You’ll be notified by your lender when your loan is sold. Take note of who the mortgage aggregator is. The programs they offer have an impact on relief that may be available to you if you get in trouble with your payments.

Mortgage originators

Mortgage originators are the original lenders who make your home loan. They may sell your loan later on the secondary market as necessary to raise capital to make more loans. Rocket Mortgage is a mortgage originator.

Mortgage aggregators

Mortgage aggregators buy loans from mortgage originators either individually or as part of the package. They then combine loans with similar characteristics into MBS that can be sold to investors.

Along with smaller private buyers, major aggregators include government-sponsored entities (GSEs) Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). They buy conforming conventional loans. Ginnie Mae backs government loans from the FHA, the VA, and the USDA.

Investors

Anyone can buy MBS through a broker, but in practical terms, these are often held in pensions, retirement, and mutual funds. You may own your own mortgage without even knowing it in your 401(k).

There are both agency and non-agency MBS. Agency MBS include mortgages backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Non-agency MBS is everything else that’s available through smaller private institutions.

How the secondary mortgage market works: step-by-step

To give you a clearer understanding of how all this works, let’s follow the journey of your mortgage through the secondary market.

Step 1: You obtain a mortgage from a lender

The mortgage origination process happens solely in the primary market between you and the lender. However, this is where it all starts. You close on the mortgage and pay the associated closing costs. In exchange, your lender funds your loan.

Step 2: Lender sells the loan on the secondary mortgage market

Lenders typically sell the mortgage on the secondary market within a couple of months after your loan closes. This enables them to make new loans right away rather than waiting 30 years for the payoff. While you may still make payments to your lender, the principal and interest payments are forwarded to the mortgage aggregator.

Step 3: Loans are bundled into mortgage-backed securities

The mortgage aggregator then bundles your loan with other similar loans into MBS, which are made available to investors. You just keep paying your loan.

Step 4: Investors buy mortgage-backed securities

Investors then buy the MBS. Their purchase decisions are based on individual or institutional risk tolerance and their goals for the return. It’s at this point that you could very well unknowingly have an investment in your own mortgage through a mutual fund or other vehicle.

Step 5: Mortgage loans are managed by a loan servicer

In the early months of your loan, you make payments to your lender. But while your mortgage is being sold to an investor, there’s sometimes a parallel process in which lenders will sell the servicing rights, meaning you’ll make your payment to someone other than your original lender. That servicer then gets the fee for payment collection.

Lenders don’t always sell servicing rights. Rocket Mortgage services the majority of the loans we close. Even if the servicing rights to your loan are sold, the terms of the mortgage don’t change.

Pros and cons of the secondary market in mortgage lending

Since the vast majority of home loans are sold on the secondary market, you typically won’t have a say in the process, but understanding the benefits and drawbacks will help you know what to expect.

Pros

• Standardized requirements: The major mortgage aggregators have published standards as to the underwriting requirements for the loans they’ll guarantee payments for. This means those applying for a mortgage can have a good understanding of what they may qualify for. There’s more predictability.
• Market liquidity: Because the secondary market connects lenders with interested mortgage investors, supply meets demand. The demand among investors can lead to a lower rate than if there were fewer buyers for your mortgage.
• Enables longer-term loans: Because loans are sold in the secondary market, lenders can recoup the funding faster to make more loans. If the market didn’t exist, loans would have much shorter terms so the lender could have capital, leading to higher payments.

Cons

• Stricter credit standards: Because mortgage aggregators have established credit standards, you may have to wait a little longer or work to raise your credit score if you’ve had some dings in the past.
• Private investment works differently: If you’re getting a mortgage that’s a jumbo loan or doesn’t meet the standards of qualification for one of the government-backed entities, private investors may or may not demand higher rates.
• Relationship with the lender: The servicing for the mortgage may be sold at the same time the lender sells the mortgage. Again, not all lenders do this.

The bottom line: The secondary market makes mortgages more affordable

The secondary market enables mortgage lenders to sell the home loan to mortgage aggregators who in turn package the loan into MBS for sale to investors. This process allows lenders to quickly earn the proceeds from your loan, creating liquidity in the market so lenders can make more loans. The terms of your loan don’t change.

Feeling confident you know what to expect? Apply online to get started.