The Secondary Market
May 6, 2010
In yesterday's blog I mentioned that lenders sell loans on the secondary market. Sometimes those of us who have worked in the real estate business think that everyone knows what we know. Foolish assumption.
Even with all the media coverage of the Fannie Mae and Freddie Mac, it may not be clear to the man on the street exactly what role these entities play in the U.S. real estate arena.
They were established to increase the ability of lenders to create home loans by providing an entity that was partly private and partly government backed that could purchase the loans originated by your local bank. By selling a loan to Freddie or Fannie, the local bank would then have the loaned funds back to use to create another loan for another borrower. Up until the financial crisis, the system seemed to operate as it was created.
Unfortunately, as you may have recently read, some smart investors figured out how to create a market, not for the loans themselves, but for securities backed by these loans. All of this and the serious downturn in home prices, caused Fannie and Freddie to pretty much be underwater themselves. The federal government stepped in to bail them out so that the secondary market would not disappear. Without the ability for local banking institutions to sell their loans, the amount of money available would become greatly diminished and would have further impacted the ability of owners to sell since there would be so little money available for making loans.
It is hoped that the stricter guidelines for the local lenders and the government bail out of Freddie and Fannie will create a more stable real estate environment and the financial markets will be functioning as they were created to function.
In yesterday's blog I mentioned that lenders sell loans on the secondary market. Sometimes those of us who have worked in the real estate business think that everyone knows what we know. Foolish assumption.
Even with all the media coverage of the Fannie Mae and Freddie Mac, it may not be clear to the man on the street exactly what role these entities play in the U.S. real estate arena.
They were established to increase the ability of lenders to create home loans by providing an entity that was partly private and partly government backed that could purchase the loans originated by your local bank. By selling a loan to Freddie or Fannie, the local bank would then have the loaned funds back to use to create another loan for another borrower. Up until the financial crisis, the system seemed to operate as it was created.
Unfortunately, as you may have recently read, some smart investors figured out how to create a market, not for the loans themselves, but for securities backed by these loans. All of this and the serious downturn in home prices, caused Fannie and Freddie to pretty much be underwater themselves. The federal government stepped in to bail them out so that the secondary market would not disappear. Without the ability for local banking institutions to sell their loans, the amount of money available would become greatly diminished and would have further impacted the ability of owners to sell since there would be so little money available for making loans.
It is hoped that the stricter guidelines for the local lenders and the government bail out of Freddie and Fannie will create a more stable real estate environment and the financial markets will be functioning as they were created to function.
posted by shirley harry at 10:21 AM
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