The two organizations that buy the most loans are the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, better known as Freddie Mac. They are private companies that began as government agencies.
This means that Freddie Mac gets its money by selling instruments that are types of bonds on Wall Street. The mortgage rates are the rate of return on the mortgage-backed securities, and the mortgages secure the debt. You can buy a mortgage-backed security, creating a big circle that keeps the money flowing.
The government agency Government National Mortgage Association, called Ginnie Mae, is also involved in the secondary market. Ginnie Mae does not buy loans or issue mortgage-backed securities. Its role is to guarantee payments to investors on their mortgage-backed securities, reducing the risks associated with these investments. Less risk generally means more people are willing to invest - keeping more money in the system so more loans can be made.
In order to make the system run smoothly, the secondary market participants set out guidelines for primary lenders. If the primary lender conforms (follows the guidelines in making the loan), it knows that the loan can be sold. Since a large percentage of primary lenders make loans with the intention of selling them, most lenders only make loans that conform to the requirements of the secondary market.
The sale of your loan does not affect your interest rate. The secondary lender buys loans based on prevailing interest rates. If a retailer wants to sell the loan, it knows the interest rate that it must charge to sell at face value. If a higher rate is charged, the loan may be sold at a premium - an amount higher than face value. If lower than the prevailing rate is charged, the loan will be sold at a discount, meaning less than face value.
Different secondary lenders have different guidelines that must be met before they will buy a loan. For example, Fannie Mae and Freddie Mac have a limit on the loan amount they can purchase for each loan. The limit changes as real estate prices change, and it is different in different regions of the country. Also, many of the participants in the secondary market only buy certain types of loans. To meet these guidelines, many originating lenders specialize in a particular type of mortgage. This helps the primary lender know who will be buying the loans it makes and if it will have a problem selling them on the secondary market.
Armed with that knowledge, a smart borrower shops around for a lender that specializes in the type of loan he or she wants. That lender will be more knowledgeable and more efficient in obtaining that type of loan. However, many lenders will simply try to sell you the loan they know best because it is easier for them. If it is not the loan that is best for you, do not stay with that lender.
There is a secondary market for all loans - even those made by individuals selling their homes and providing the financing to the buyer themselves. It consists of individuals and companies that specialize in buying these mortgages. Without the larger players, this is a much smaller market. Since these mortgages are usually sold at a substantial discount (much less than their face value), it may be more difficult to find a lender providing loans that can be sold in this market. The buyers in this secondary market have their own guidelines, which may be very different from those of the large institutions like Fannie Mae and Freddie Mac.
A lender can make a mortgage loan without following anyone's guidelines, as long as the loan does not violate the law. Any lender planning to keep the loan for its own portfolio follows its own guidelines.
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