Secondary markets do not lend money directly to borrowers. Instead, they provide funding to the primary mortgage and money institutions such as savings and loans, commercial banks, and credit unions. They do so by purchasing the loans these lenders have made, guaranteeing them, and selling them to investors.

The money generated by this transaction is then used to purchase more loans. By purchasing the loans from primary lenders, the secondary markets ensure primary mortgage and money institutions have the funds to continue to lend to home buyers and do so at reasonable rates.