Secondary Market is a key concept for the Real Estate Exam

Secondary Market is a key concept for the Real Estate Exam

once the loan is originated out in the primary market it may be sold on the secondary market the secondary market is where lenders and investors buy and sell existing mortgage or mortgage-backed securities thereby providing greater availability of funds for additional mortgage lending simply said the secondary market is the resale market place of loans that may sound like a lot of gibberish to use let me give a little history that may help let's go back to the 1920s you know the Roaring Twenties Babe Ruth was hitting homeruns people are swing dancing it was a great time in our country until 1929 you see prior to the stock crash of 1929 most lenders required a borrower to have a down payment of 20 to 40 percent if that was the case today not many people would be able to afford a home not only did the lenders require large down payment but the loan was a straight mortgage which meant they would only have to pay interest the term was typically 1 to 7 years and if at the end of the term if the borrower cannot pay the entire balance a new loan be negotiated so clearly this was for the very wealthy a very small percentage people could afford that downpayment thus most the country became a society full of renters and as we know that's not a great way to build wealth which led to the Great Depression after the stock crash the government needed to stabilize the economy and stimulate the market so in 1934 the government introduced FHA insured loans FHA insures loans FHA does not make loans the FHA made it possible for people to purchase a home with a smaller down payment a smaller monthly payment would be made to the lender over the course of 30 years a portion of the payment be applied to the principal and the remaining would be interest a 30-year fixed-rate mortgage the monthly payment was a new concept at the time this was done to reduce the risk the lender the FHA required the lender to verify borrower's employment have the property appraised by a neutral third party and have a title search done the government guidelines are met the lender would negotiate a loan the lender the government knew that over the course of 30 years the borrower may default on the loan the borrower a one-time upfront insurance premium based on a loan amount and one 1/2 percent annually on the loan balance the borrower defaults on the loan and the loan amount exceeded the price of the property the FHA would pay the difference but by 1938 the lenders who can offer these FHA insured loans had a problem you see remember when the banks took that twenty to forty percent deposit well they also had the money on hand from those deposits to make new loans now they weren't getting paid back in thirty years they didn't have any money to lend out to anybody they couldn't wait 30 years to do another loan so banks did not want to have to turn anybody away because all the money was loaned out for the next 30 years or so so in 1938 the government created the federal National Mortgage Association or as you may know Fannie Mae this was to buy FHA insured mortgages from lenders this would provide lenders with a rollover of funds so they would not have to turn any potential buyers away and then when the veterans returned from the war in 1935 Fannie Mae agreed to buy VA guaranteed loans that the lenders had negotiated eventually Fannie Mae started purchasing loans from lenders if the loans met Fannie Mae guidelines today Fannie Mae is a quasi government agency that is privately owned and Fannie Mae stock may be purchase on new york stock exchange fannie mae buys mortgages on the secondary market pulls them together and then sells them back as mortgage securities to investors in the open market monthly principal interest payments are guaranteed by Fannie Mae but not by the US government in 1968 Fannie Mae was split and the government National Mortgage Association or Ginnie Mae as you may know it was created Ginnie Mae is a federally owned corporation in the Department of Housing and Urban Development Ginnie Mae administers special assistance programs the main focus of Ginnie Mae is to ensure liquidity for US government insured mortgages including those insured by the FHA and VA well hopefully that explains the secondary market a little bit for you but if you take nothing else from this remember the secondary market is the resale market place of loans that is the key element – this whole lesson

Fannie Mae

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