Primary and Secondary Real Estate Markets Quiz & Flashcards

Study Notes

Primary market: the financial arena for home buyers applying for loans and lenders originating them; traditionally a local market with lending institutions.
Real estate cycles impact local markets, where demand and supply for mortgage funds fluctuate; the secondary market mitigates these cycles.
Secondary market: a national marketplace for buying and selling mortgage loans, which can be sold like other investments.
Present value of a loan is determined by the yield available on similar quality investments; loans can be sold to other lenders or secondary market entities.

Fannie Mae (Federal National Mortgage Association): created in 1938 to buy FHA-insured loans; reorganized into a private corporation in 1968 but operates as a GSE under FHFA supervision.
Freddie Mac: established to help savings and loans by purchasing conventional loans.
GSEs issue mortgage-backed securities (MBS), pooling mortgages as collateral for securities sold to investors, providing them with monthly payments of interest and principal.
GSEs are mandated to meet annual affordable housing goals, enhancing mortgage fund availability.

The first MBS program was launched by Ginnie Mae in 1970, backed by FHA and VA loans, followed by Fannie Mae and Freddie Mac with pools of conventional mortgages.
MBS are attractive to investors as they are often guaranteed by the issuing secondary market entity, providing lower risk.
GSEs generate funds from the sale of MBS to purchase additional loans, which supports the primary market.

GSEs establish standardized underwriting guidelines, ensuring loan quality and instilling investor confidence regarding MBS.
Primary market lenders are more inclined to extend specific types of loans when GSEs agree to purchase them.
Historically, GSEs limited themselves to prime loans but began purchasing subprime loans as an effort to meet affordable housing goals.

Both Fannie Mae and Freddie Mac were placed under federal conservatorship in 2008, overseen by FHFA, due to risks associated with the subprime mortgage crisis.
The conservatorship aimed to stabilize the mortgage market and restore balance between supply and demand for mortgage funds.

The flow of funds from GSEs through MBS enhances homeownership opportunities and stabilizes real estate investments during economic fluctuations.
Mortgage cycles are characterized by active periods and slumps, influenced by local supply and demand imbalances in mortgage funds.

Ongoing legislative and regulatory changes post-2007 aim to reinforce the roles of GSEs and stabilize the housing finance system, ensuring broader access to mortgage funds.

3. Real Estate Markets: Primary and Secondary Markets TF