Legal Definitions - secondary lender

A secondary lender is a financial institution or entity that purchases existing mortgage loans from the original lenders, such as banks, credit unions, or savings and loan associations. These purchases are typically made in large batches, often referred to as a "wholesale" transaction. The primary purpose of a secondary lender is to provide the original lenders with immediate cash, which they can then use to issue new mortgage loans to other borrowers. This mechanism is crucial for maintaining a continuous and robust flow of capital within the housing market, ensuring that funds are consistently available for new home purchases.

Here are some examples to illustrate the role of a secondary lender:

• Imagine a local community bank, "Main Street Bank," has successfully issued many home loans to families in its town. As its loan portfolio grows, the bank's available cash for new loans starts to diminish. To continue meeting the demand for new mortgages without waiting for existing loans to be paid off over decades, Main Street Bank sells a large package of these existing mortgages to a major national entity like Fannie Mae (Federal National Mortgage Association). In this scenario, Fannie Mae acts as the secondary lender, providing Main Street Bank with a significant sum of cash. This allows Main Street Bank to "restock" its funds and continue originating new home loans for other aspiring homeowners in the community.

• A regional credit union, "Valley Credit Union," has a strong focus on helping its members achieve homeownership. After a period of high demand for mortgages, Valley Credit Union finds its balance sheet heavily weighted with long-term mortgage assets, limiting its capacity to offer other types of loans or meet regulatory capital requirements. To free up capital and diversify its holdings, Valley Credit Union decides to sell a substantial portion of its mortgage portfolio to a large investment firm specializing in real estate debt. Here, the investment firm functions as the secondary lender, purchasing the existing mortgages and providing Valley Credit Union with the liquidity it needs to manage its balance sheet and offer new financial products to its members.

• Consider a situation where a smaller online mortgage broker, "Swift Home Loans," originates many mortgages but does not have the capital reserves to hold these loans for their entire 15- or 30-year terms. Instead, Swift Home Loans quickly sells the mortgages it originates to a larger financial institution that specializes in buying and servicing loans, such as a major national bank's mortgage division or a dedicated mortgage aggregator. In this arrangement, the larger financial institution or aggregator is the secondary lender. By purchasing the loans from Swift Home Loans, they enable Swift Home Loans to operate efficiently, focusing solely on originating new loans without the burden of long-term financing and servicing, thereby facilitating a quicker and more streamlined mortgage process for borrowers.