What is the secondary mortgage market?

The secondary mortgage market is a marketplace specifically designed for the buying and selling of existing mortgages. This market plays a critical role in the overall functioning of the housing finance system, as it provides liquidity to lenders. When lenders can sell mortgages to investors, they have more available capital to create new loans, enhancing their ability to offer more mortgages to consumers. This process is facilitated through various entities such as government-sponsored enterprises, including Fannie Mae and Freddie Mac, which buy mortgages from lenders and either hold them in their portfolios or package them into mortgage-backed securities for sale to investors.

In contrast to a marketplace for unsold properties or the initial sale of real estate, which pertain directly to the buying and selling of physical property rather than financial instruments, the secondary mortgage market focuses exclusively on financial transactions involving existing mortgage agreements. Hence, recognizing the distinction here is essential for understanding the function and importance of the secondary mortgage market in real estate finance.