Mortgage Markets Explained: Primary vs. Secondary

According to Federal Reserve Bank of New York, the United States is home to a massive mortgage market, valued at $12.94 trillion in 2025. 

This financial sector is divided into two separate markets. These are known as the primary mortgage and the secondary mortgage markets.  

Different mortgage markets serve a particular need for homebuyers and investors who put money into the mortgage market.

• The primary mortgage market: This market serves the home-buying public and links borrowers with mortgage lenders.
• The secondary mortgage market: The secondary market exists for investors who invest in existing mortgages seeking returns on that investment.

This article will take a deeper dive into the primary and secondary mortgage markets, comparing and contrasting the two.

What is the primary mortgage market?

The primary mortgage market is the loan market, where homebuyers obtain their mortgage and borrow directly from lenders.

The National Association of REALTORs® has reported that nearly 74% of all home buyers financed their home purchase in July 2023–June 2024 cohort. This financing generally came from mortgages obtained through the primary market.

Homebuyers and those looking to refinance can obtain direct mortgage loans through various sources that make up the primary mortgage market, including:

• Banks or credit unions: Credit unions and banks are the most common primary lenders and the source of most primary mortgage loans issued in the United States.
• Mortgage brokers: A mortgage broker is not a lender. However, the mortgage broker’s job is to find quality primary lending sources on behalf of customers looking to buy or refinance. Mortgage brokers have direct access to lenders in the primary mortgage market. They can be incredibly beneficial to borrowers looking for the right mortgage based on their credit history and desired loan terms.
• Online lending tools: Numerous online financial institutions offer borrowers the opportunity to secure home loans, often with lower fees and interest rates than more traditional lending institutions. However, not all online lenders are more affordable. Therefore, it is important for homebuyers to weight all of their available options and consider various lending options.

What is the secondary mortgage market?

The secondary market allows investors to buy into existing mortgage loans to turn a profit.

Selling a mortgage is commonplace for most banks and primary lending institutions. It is a way to regain capital and continuously offer loans to borrowers. 

As a result, several organizations operate in the secondary mortgage market by purchasing existing loans from primary lenders and reselling them to mortgage investors. 

They include:

• The Federal National Mortgage Association (FNMA): One of the largest secondary loan providers is the FNMA, also known as Fannie Mae. This GSE is one of the largest participants in the secondary mortgage market and operates under FHFA oversight. In federal conservatorship since 2008, it issues MBS not backed by the U.S. government’s full faith and credit. As a for-profit corporation, Fannie Mae works alongside Freddie Mac to provide housing market liquidity by purchasing loans from diverse lenders.
• The Government National Mortgage Association (GNMA): GNMA, also known commonly as Ginnie Mae, a U.S. government corporation that guarantees timely P&I to investors on MBS backed by FHA/VA/USDA loans (full faith and credit); it does not purchase loans.
• Federal Home Loan Mortgage Corporation (Freddie Mac): known more commonly as Freddie Mac, is similar to Fannie Mae. It is a private company operating within the secondary loan marketplace. It purchases most of its loan notes from savings and loans institutions.

How does mortgage investing work?

Mortgage investors supply capital for the secondary market, with eligibility and underwriting standards guided by Fannie Mae and Freddie Mac Selling Guides, plus any additional lender overlays.

This constant financial flow keeps the market afloat by ensuring that lenders have enough money for borrowers and allowing more home buyers to secure loans.  

When a borrower obtains a mortgage, they primarily work with a lender. First, they apply for the loan, and once approved, they receive the money needed to purchase or refinance. 

Then, the borrower pays back the loan and interest until the debt is paid overtime.

If lenders were to rely exclusively on the monthly mortgage payments, they would not have enough money to offer other potential borrowers. 

That’s where mortgage investors come in. Lenders sell mortgage loans to investors through the secondary market, allowing them to secure the funds necessary to issue more loans.

As borrowers pay off these mortgages, payments are distributed to private investors that bought mortgage-backed securities on the secondary market.

How are mortgage rates determined?

Various factors determine mortgage rates. Some factors are within a borrower’s control, and some are not.

Factors within a borrower’s control

Lenders will adjust their mortgage rates based on loan risk. The riskier a loan is, the higher the interest rate. 

In determining risk, a lender will consider the likelihood of the buyer’s failure to repay the loan and how much the lender stands to lose should the borrower default.

There are two significant factors in this consideration, including:

• Credit score: For conventional, the best credit score typically starts at 780+ (then 760–779), per current LLPA tiers.
• The loan-to-value ratio: The larger the down payment, the lower the loan-to-value ratio. Above 80% LTV on conventional loans usually requires PMI and can add risk-based LLPA costs; the total cost (rate + PMI) rises.

Factors outside of a borrower’s control

Market forces ultimately set the overall mortgage rates. Rates increase and decrease daily, based on economic indicators such as inflation, unemployment rates, job growth, and the economy’s overall strength.

Mortgage rates are largely a function of bond-market pricing, especially the 10-year Treasury yield, plus a spread reflecting MBS pricing and origination costs.

Fed policy can influence rates indirectly via expectations, but it doesn’t set mortgage rates.

Final thoughts on mortgage markets

The way that the primary and secondary mortgage markets work together is necessary for borrowers to continue accessing the funds needed to purchase or refinance a home. 

The relationship between the two markets is symbiotic.

Primary mortgage markets give borrowers access to the funds needed to purchase a home. 

The secondary mortgage market replenishes those funds by allowing lenders to sell those mortgages to Ginnie Mae, Fannie Mac, Freddie Mae, and other private investors.

It’s a win-win situation for everyone involved, and it is the engine that keeps the housing market alive.