What does a lender do in the secondary market?

• A. Offers fixed-rate mortgages
• B. Sells loans to investors
• C. Hedges against interest rate risks
• D. Provides mortgage insurance

Answer: (B)

In the secondary market, a lender sells loans to investors, which serves as a critical function in the mortgage finance system. When lenders issue mortgages, they often do not hold these loans in their portfolios for long-term collection of payments. Instead, they sell them in the secondary market to investors or other financial institutions. This process allows lenders to recover the funds used to make the loans, enabling them to finance new mortgages and maintain liquidity. The investors, in turn, receive the right to collect on the loan repayments, often bundled with similar loans into mortgage-backed securities (MBS), which can be sold to other investors.

This dynamic supports the overall funding of home loans and makes capital more available in the primary market, where borrowers obtain their mortgages. Other choices represent different roles and aspects in the mortgage industry but do not specifically describe the lender's activities in the secondary market. For instance, offering fixed-rate mortgages pertains to the primary mortgage market, hedging against interest rate risks is more of a risk management strategy, and providing mortgage insurance relates to protecting lenders against borrower defaults.