What is the role of the secondary mortgage market?

• A. Banks lend to borrowers directly; no involvement of investors.
• B. The government funds all mortgages; secondary market has no role.
• C. Lenders sell mortgages to investors (often Fannie Mae/Freddie Mac) to free capital, transfer risk, and support liquidity; mortgages may be securitized.
• D. It only handles mortgage insurance; not securitization.

Answer: (C)

The main idea is that the secondary mortgage market provides liquidity for lenders by allowing them to sell already-originated loans to investors, freeing capital to make more loans and transferring some risk. In practice, lenders often sell loans to investors—frequently through government-sponsored enterprises like Fannie Mae and Freddie Mac—so they can recycle funds and continue lending. A common way this happens is through securitization, where many mortgages are pooled and issued as mortgage-backed securities that investors buy. This spreads risk across a broad investor base and makes funding cheaper and more stable for the lending system. The secondary market doesn’t fund every loan directly, but it creates a mechanism to keep mortgage credit flowing.