The major contribution of the secondary market in the United States is that it has opened the mortgage market to long-term lending in a way that the main alternative source of funds, depositories (historically, savings and loan associations, currently mainly banks), generally cannot or have not. This has allowed borrowers access to long-term fixed rate loans (15 to 30 years); such loans are now over 80% of the market and carry rates of around six percent. Over half of all U.S. mortgages are now sold into the secondary market. While most of the institutions that participate in the secondary market are privately owned, the system receives considerable government support. The purpose of this paper is to discuss the workings of the U.S. secondary mortgage market, it’s place in the U.S. mortgage market, the benefits and costs of government support and lessons that might be learned and/or exported. The focus is on the two major secondary-market institutions, the “government-sponsored enterprises” or “GSEs,” Fannie Mae and Freddie Mac, both of which are privately owned but with important government support.

The major change in mortgage markets over the past twenty years, one which has been brought on largely by the secondary markets, has been the “unbundling” of the four major aspects of mortgage lending: origination, servicing, funding and accepting credit risks. This is most evident on the investment side. Investors in mortgages need not be involved in originating, servicing, or taking on credit risk. Pools of mortgages (mortgage-backed securities with guarantees from Fannie Mae, Freddie Mac or Ginnie Mae) and mortgage-backed debt (mainly debt of Fannie Mae and Freddie Mac) now trade in national and international markets, almost as efficiently as U.S. Treasury securities. This has opened the mortgage market to investors in long-term bonds, who might not otherwise invest because of the difficulty of assessing the credit risk of individual mortgages.