Some lenders decide that they want a steady and secured income coming from systematic, monthly payments from the borrower. They collect their income in the form of interest earned on the loan. The higher the loan and the longer the term of the loan, the higher the interest going to the pockets of lenders is.
If the lender decides to sell the loan immediately after underwriting it, it then operates in the Secondary Market. These lenders make their money by bundling these loan notes together into a package and then selling them to a different lender in the secondary market.

If the volume of the loans they sell on the secondary market is significant, they make quite a bit of money on a monthly basis without worrying about the future of the loan, reducing interest rates, or potential problems with the borrower. They forfeit their potential future earnings in exchange for cash on hand today.

The secondary market copes with mortgages that were originated in the primary market and consists of investors who buy the mortgage notes. It allows mortgage lenders to refill their cash reserves, which, in turn, permits them originate even more new mortgages. The investors profit from the attention that the mortgages charge.

There are both private and public investors. The first group consists of banks, thrift institutions and other private individuals, while the secondary market consists of public investors. The major public investors are: Federal National Mortgage Association (FNMA) also known as Fannie Mae, Government National Mortgage Association (GNMA), known as Ginnie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac.

Fannie Mae was founded in 1938 for the purpose of providing a secondary market for mortgages insured by Federal Housing Administration (FHA). It is a government sponsored corporation that buys mortgages on the secondary market, pools them, and then sells them as mortgage-backed securities on the open market. As explained earlier, it helps to replenish the supply of lendable money in the primary market.

Ginnie Mae is a wholly owned corporation within the Department of Housing and Urban Development (HUD). It came into existence in 1968. Ginnie Mae’s provides financial assistance to low and moderate-income homebuyers by means of promoting mortgage credit. It also guarantees payment of principal and interest on mortgage-backed securities.

Secondary market is a very important player in the mortgage business. It provides liquidity in the market. Let us assume that a bank wants to sell one or more mortgages but no one else wants to purchase them. That is where any of the three above-mentioned public investors step in who entered the loans. They will buy these loans and thus enable the bank to make more home loans.

In order for these loans to be purchased by one of the public investors, the loan has to adhere to sets of pre-determined criteria established by Fannie Mae, Freddie Mac or Ginnie Mae. In a case borrower defaults on the mortgages after it has been sold at the secondary market, and it is later found out that these guidelines were not met, the bank that originally approved the loan might be forced to buy the loan back.

Fannie Mae’s responsibility for government issued mortgages was passed on to a new government owned corporation within the Department of Housing and Urban Development called the Government National Mortgage Association. Ginnie Mae, as it is commonly known, also pools mortgages into bonds from pre-approved lenders. In this process, Ginnie Mae allows lenders to issue bonds for its mortgages with a guarantee on repayment. In exchange, Ginnie Mae receives a guarantee fee, typically for less than one per cent of the loan. As of 2003, Ginnie Mae claimed to have guaranteed securities on homes for a total of more than $2 trillion.

The largest organizations in the secondary mortgage market also include the Federal Home Loan Mortgage Corporation (commonly known as Freddy Mac) and the Federal Agricultural Mortgage Corporation (known as Farmer Mac. These organizations both work in a manner similar to Fannie Mae’s, by buying mortgages from banks and other primary lenders, and providing liquidity and investment opportunity to the mortgage market.

The impact of groups like Fannie Mae, Ginnie Mae, Freddy Mac, and Farmer Mac could increase significantly if government lowered its regulations on this market. For example, a stimulus package being considered by government could allow Freddy Mac and Fanny Mae to buy many more mortgages by raising the value limit for Freddy Mac and Fanny Mae mortgages by more than 80 per cent.