At its most basic level, the act of buying a house is like any other consumer transaction—it would involve only two parties, a buyer and seller, exchanging the entirety of an agreed-upon amount of money for the ownership of a property. However, for such a large purchase as a property, it is rare for such a simple transaction to take place. Mortgage companies exist as a third party to help home buyers, by lending them the money to make their purchase and then managing the installment schedule by which the buyer pays back their loan. This system is referred to in the industry as the primary market. Mortgage companies, however, will also engage in the practice of re-selling those mortgage notes to public or private investors, thereby creating what is known as the secondary market. Over time, this secondary market has become both a lucrative system for investors and mortgage companies, as well as a vital component of the housing market’s health and viability.

The largest investors in the secondary market are the government sponsored enterprises known as Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA), as well as the private corporation Wells Fargo. Fannie Mae was established in 1938 as part of FDR’s New Deal, and became a public corporation in 1968. Freddie Mac was established by Congress during the Johnson administration as a measure to alleviate the 1960s credit crunch in the housing market, and also to prevent Fannie Mae from monopolizing the secondary market; it became a public corporation in 1989. Both entities work to strengthen the primary market by ensuring that mortgage lenders have plenty of funds to loan to home buyers.

The creation of the secondary market also gives mortgage companies further flexibility in lending through the competition engendered by the secondary market. Secondary market investors build relationships with mortgage companies that may lead to lower lending rates. A mortgage company’s access and appeal to several such investors allows that mortgage company to broaden the scope of its lending, based on what they expect they can re-sell on the secondary market. This whole process makes it easier for home buyers to have their loans approved—and obviously, it remains in everybody’s best interest for the housing market to remain robust with home buyers.

The Secondary Market: By now, everyone’s heard of the secondary market, which provides liquidity to the primary mortgage market when mortgage bankers and investors team-up to sell and buy existing mortgages. But how do mortgage companies actually work with players in the secondary market? Jeremy Gannon, Secondary Marketing Manager at PERL Mortgage, discusses the concept of the secondary market.

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Market Comment
Mortgage bond prices rose last week, pushing mortgage interest rates lower. The bond market was buoyed by the announcement that US Treasury increased Fannie Mae and Freddie Mac credit lines to a total of $400 billion. This was a signal to investors that these entities are “too big to fail”, as viewed by the Treasury. We saw some weakness Thursday afternoon as retailers reported stronger than expected holiday sales. The employment report Friday was generally bond friendly.

For the week, interest rates fell by about 1/4 of a discount point.

The inflation data Friday will be the most important economic data this week. Signs of stronger than expected inflation would not be positive for mortgage interest rates. The Treasury auctions will also dominate trading. Stronger than normal foreign demand could bode well for the overall level of interest rates.

Employment Results
The December employment report came in relatively bond friendly. Unemployment came in at 10% as expected. However the payrolls component showed job losses of 85,000 compared to the 35,000 losses expected by analysts. The mortgage bond market had a generally positive reaction to the report but improvements in rates were tempered by concerns for some of the revised data from prior months. Revisions to the November figures showed a 4000-job increase as opposed to the original 11,000-job decrease.