When you’re buying a home, it feels like the most important thing in the world: Is my mortgage approved? Can I get my mortgage? But then you close on the property, and you start sending in your mortgage checks once a month, and all those dealings you had with your lender kind of fade away. It may surprise you to find out that it’s that way for them too. It used to be that a lender would make you a mortgage loan, and you’d send them a check every month, and they’d take it.
The Secondary Mortgage Market
Now, likely as not, they’re going to sell off your loan into what’s called the secondary mortgage market. What does that mean to you? Well, in the short-term, nothing. Your payments won’t change, although you may end up sending your check to a different place. My first mortgage was through Dime, I think (I’ve owned a couple of places since then because I like to play real-life Monopoly), and then I ended up sending checks to Chase or somebody like that. But as you can see from the fact that I can’t remember, who your loan gets sold to is not that important—unless there’s only one buyer. That’s what’s been happening with mortgages lately...and by lately I mean the past couple of years. There’s basically one secondary buyer, and that’s Fannie Mae, a federally established organization set up to buy mortgage loans.
A Secondary Market Was Created to Lower Risk
The original idea was that by having a secondary buyer, the federal government would reduce the risk to the banks, and that would generally lower interest rates, and having lower interest rates would make it easier for Americans to buy houses. Well, when Fannie Mae was set up in 1938 during the Great Depression, that was a swell idea. The problem is that a lot has changed in the 70 years since then. Nowadays, having just one buyer means that everybody plays by pretty much the same set of rules—Fannie Mae’s rules. (In case you’re curious, “Fannie Mae” stands for Federal National Mortgage Association.) Fannie Mae and its brother organization, which is nicknamed “Freddie Mac,” own or guarantee more than half the mortgage loans in the U.S. That’s a pretty big gorilla!
A Secondary Market Standardizes Procedures
In the current mortgage market, that means that you’ll pay pretty much the same penalty for having a low credit score, no matter which bank you go to. It means that the paperwork—which, if you’re buying a house, is enough to drive you nuts—is becoming pretty standardized. If one bank wants a certain kind of letter from your employer, then they’re all going to want it. (Which is really annoying if you work for a huge corporation, where the human resources department doesn’t want to write those letters, and instead sends you to a web site.)
You know how your mom and dad used to say “you can’t fight City Hall?” Well, today, we could say “you can’t fight Fannie Mae.” When your mortgage officer asks for you for yet another piece of paper, remember it’s for his secondary buyer, and there’s probably no way to skip it. Just do it.