What is the primary purpose of selling mortgages to investors in the secondary market?

• A. To insure against default only.
• B. To delay closings.
• C. To set interest rates higher for borrowers.
• D. To free capital for lenders, transfer risk, and support liquidity.

Answer: (D)

Selling mortgages to investors in the secondary market frees capital for lenders, transfers risk, and supports liquidity. When a lender sells a loan, they get cash back that can be used to fund new loans, so they don’t have to tie up their funds in each long-term mortgage. The investor who buys the loan or the pool of loans takes on a share of the credit risk and the ongoing cash flows, which spreads risk and helps the market function smoothly. This process creates a steady supply of available funds and makes it easier for lenders to issue more loans, often at more favorable terms over time because their funding costs are reduced and liquidity is maintained. It isn’t about insuring against default, and it doesn’t serve to delay closings; and while funding efficiency can influence rates, the primary purpose is to free capital, transfer risk, and support liquidity.