The U.S. Mortgage Market: A Model of Dueling Charters

Understanding mortgage markets requires understanding the changing roles of and the competition between the primary and secondary markets. A description of the competitive structure of the mortgage market can be summarized as one of dueling charters. Of the two major charters in the industry, one is for depositories (banks and thrifts), which have been traditionally identified as the primary market, and the other is for the government-sponsored enterprises (Fannie Mae and Freddie Mac), which operate a secondary market. However, the distinction between primary and secondary markets has grown less important than that between charters. Today there are basically two different ways (e.g., via a bank or via Freddie Mac) of moving money from the capital markets to the mortgage market. The competitive balance in the industry depends on which charter’s route is cheaper, primarily in terms of fund-raising and controlling risk. The competition between the charters can be modeled as the balance between the lower costs of the secondary market and the selection advantages of the primary market. This article develops a framework for understanding the evolution and structure of American mortgage markets by modeling this balance and discussing how it has changed over time.