Possible changes to Fannie Mae and Freddie Mac have been in the news for years. But last week Bill Pulte became the Director of the FHFA (Federal Housing Finance Agency) which has overseen Freddie and Fannie since 2008. Fannie and Freddie dominate the secondary markets for mortgages, so Orion’s management thought it a good time to provide a basic view of the “secondary” markets for our brokers so that you can pass this on to your borrowers. (The “primary” markets are where borrowers obtain financing from you and Orion.) The secondary markets area legitimate topic, especially as the existence of a secondary market for home loans leads to lower rates for borrowers, and also helps explain why Fannie Mae and Freddie Mac exist.

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Let’s start with a simple example. Let’s say a person (“Joe”) has $1,000 in savings. Joe is approached by his brother who wants to borrow $1,000. They have a good relationship, the brother is a good credit risk, a deal is struck and the$1,000 is loaned out by Joe.

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Thefollowing day Joe is approached by his sister, an equally good risk, who wantsto borrow $500. In spite of wanting to help, and earn interest, Joe has nomoney to lend, so must say “no” to his sister, and in fact must say no to everyother opportunity to lend money out until his brother pays him back. If someoneapproached Joe, however, and offered to “buy” the first loan to his brotherfrom him, and pay him $1,001, two things would happen. First, Joe’s brotherwould start sending his payments to the buyer of the loan. But second, and moreimportantly, Joe would make $1 and have $1,000 to lend out to his sister orother people who are good credit risks.

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This is exactly what happens with many lenders like Orion: they make a loan through a broker and then sell the loan to a buyer (who commences collecting the monthly payments), and turn around and make more loans to other good credit risks. In many cases the buyers of the loans are either Freddie Mac or Fannie Mae, or large banks who then begin collecting the monthly payments from the borrower. And lenders like Orion have the ability to do what they do best: offer good financing rates to our clients so that you can offer them to yours.

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One of the primary reasons Fannie & Freddie were created was to serve this function in the secondary markets, and it is one of the reasons that many lenders want them to continue to do business. Currently they are being run by the U.S. Government (under “conservatorship”), but moves are underway to change that, and hopefully borrowers are not negatively impacted, and Orion’s AEs will continue to offer the great products and service for which we are known.

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