Before you can answer the question of who buys mortgages on the secondary market, you need to know how mortgages work. Basically, a mortgage is a loan where your house is the collateral. A bank or other lender lets you borrow a large percentage of the cost of the home, and you have to pay back that money with interest over a predetermined length of time. If you don't manage to make your mortgage payments, the bank or lender can foreclose your home and sell it in order to regain the money it lent. The size of your loan depends on how much of the total cost of the house you put down at the outset. Typically, buyers put down around 20 percent of the house's cost.
So how do the banks and other lenders make money on your mortgage? While you'd think it would be the interest that accrues over the life your mortgage, it isn't. That comes in too slowly to be of much good, since the lenders need the liquidity to lend large amounts of money to other homebuyers. Instead, mortgage lenders sell your mortgage on the secondary investment market, typically to one of two government-sponsored enterprises, or GSEs. The Federal National Mortgage Association is commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation is known as Freddie Mac. Once Fannie or Freddie buys a mortgage from a lender, they sell that same mortgage in the form of securities in the bond market. That way, lenders get money to supply more mortgages.
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Until 2006, mortgage-backed securities were safe investments; but when the housing market crashed and hundreds of thousands of people defaulted on their mortgages, the securities lost their value. To rescue the situation, the Federal Housing Finance Agency became a conservator for Fannie and Freddie. Still, Fannie and Freddie remain the major mortgage buyers on the secondary market.
