The mortgage originator is the first company to participate in the secondary mortgage market. Mortgage originators consist of retail banks, mortgage bankers and mortgage brokers. While banks use their traditional sources of funding to close loans, mortgage bankers often use what is known as a warehouse line of credit to finance loans. Most banks and almost all mortgage bankers quickly sell newly created mortgages in the secondary market.
The decline in bank lending contributes to the overall decline in homeownership, Burns says, because people with a slightly risky credit profile are underserved. Now, almost 10 years after the start of the collapse, the mortgage market has a stronger base, with foreclosures falling and lending on the rise, but private mortgage buyers, such as hedge funds, bond funds and investment banks, are still wary of being burned in the latest crisis, so who are buying less than 10% of the mortgages they made a decade ago. One distinction to keep in mind is that banks and mortgage bankers use their own funds to close mortgages and mortgage brokers don't. Under this system, mortgage credit was continuously available until the late 1990s, at terms and prices that made sustainable homeownership affordable for most American families.
Fannie and Freddie also have some mortgage loans and mortgage securities in their own investment portfolios. This makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners and other mortgage borrowers. In addition, when private buyers, such as investment banks and hedge funds, buy riskier loans with higher interest rates, known as private label securitization, the banks that originally sold the mortgages can continue to lend to imperfect borrowers. Aggregators buy newly created mortgages from smaller originators and, together with their own originations, form pools of mortgages that securitize in securities backed by private label mortgages (working with Wall Street firms) or form securities backed by agency mortgages (working through GSE).