Mortgage pump primed by secondary market

With as little noise -- but with as much determination -- as a tree growing in the backyard of a suburban split-level, a relatively new element has been working its way into the US home-buying picture.

This is the "secondary mortgage market" -- a network of banks, insurance companies, private investors, and government agencies that buys mortgages from lenders dealing directly with property buyers. The home buyer may never know his loan has been sold, because he or she continues to make monthly payments to the original lender.

While lenders may demand as much as 25 percent down payments on home purchases, the secondary mortgage market is an important reason that mortgage money continues to be available in many parts of the country.

The traditional sources of this money -- savings and loan associations, mutual savings banks, and to a lesser degree, commercial banks -- have been losing deposits to higher-yielding investments, such as money market funds. But they have found the secondary mortgage market to be a massive source of money for making new mortgage loans. Many lending officials assert that it is the main reason there is still any mortgage money available for purchases of existing homes and, by extension, for construction of new housing units.

Between 1970 and 1977, secondary market sales of residential mortgages increased more than 10 times, from $3.8 billion, or 13 percent of all mortgages, to $39.4 billion, or 24 percent. The most dramatic growth in the secondary market has occurred in the last two or three years, as interest rates have climbed.

"The secondary market is 'where it's at' in home mortgages," says Ann Gallagher, head of the residential mortgage market at New England Merchants National Bank in Boston. "We've been in it for about nine years. The S&Ls are just now getting in."

A lender operating in the secondary market gathers recently written mortgages and "sells" them to an investor who supplies the lender with more money -- at a fixed interest rate -- so the lender can continue to write mortgages.

The largest buyer of home mortgages is the US government or government-sanctioned agencies, operating under such folksy names as "Ginnie Mae" (Government National Mortgage Association), "Fannie Mae" (Federal National Mortgage Association), and "Freddie Mac" (Federal Home Loan Mortgage Corporation). But the largest of the government purchasers is the Federal Housing Administration (FHA) and the Veterans Administration (VA). While FHA/VA mortgages require qualified home buyers, the others are simply means of generating more money for mortgage lenders.

Fannie Mae was organized as a government agency in 1938 to purchase government- guaranteed mortgages and reorganized as a privately owned corporation in 1968. It also began in 1971 to buy conventional mortgages -- those made without government assistance. To finance this portfolio, it issues short-term discount notes and intermediate- term debentures that are sold to the public.

Ginnie Mae issues "pass-through" securities that provide ownership interest in the monthly payments from a pool of government-guaranteed or government-insured mortgages. The government guarantees the timely payment of principal and interest on these securities.

In 1970, Congress established Freedie Mac to issue pass-through securities backed by conventional mortgages. These are called mortgage participation certificates and guaranteed mortgage certificates.

Encouraged by the success of Freddie Mac securities, banks, savings and loan associations, and private mortgage companies have started in the last several years to issue both mortgage-backed bonds and pass-through securities without government involvement.

Interest rates in the secondary market have to be high enough to attract investors, which means they have to compete with such investments as money market certificates and mutual funds. "We're going to see a greater integration between the money markets and the mortgage markets," noted a spokesman for one Boston-area mortgage company, who asked not to be identified. ("Some in this business are afraid that if too much is known about them, people will think we're anticonsumer.")

People who put money into the secondary market "are going to want a return that is comparable with other investments," said Richard Formsma of the mortgage department at Union Bank & Trust Company in Grand Rapids, Mich. "You've got to have an incentive to bring them in." That "incentive" is currently about 12.5 percent.

One advantage to the secondary market, bankers and mortgage company officials say, is that it tends to take mortgage money from areas where it is in surplus and make it available in areas where there is a shortage.

Although the existence of the secondary market does make a continuing supply of mortgage money available, it also may tend to keep mortage interest rates from coming down as quickly or as far as they once did. "I don't think you'll ever see rates much below 10 percent again," Miss Gallagher said, pointing to the secondary market as a prime reason for this.

"The secondary market doesn't make it any easier for the first-time buyer or someone who can't come up with a large down payment," Mr. Formsma added. In his area, he said, lenders are asking 20 to 25 percent down payments. This, combined with the high interest rates, means that "many people simply can't qualify."