Why was the secondary mortgage market created by the federal government?

The secondary mortgage market was established primarily to moderate the economic effects of local real estate cycles. This market allows lenders to sell the mortgages they originate to investors. By doing so, it provides liquidity to lenders, enabling them to have more capital available for issuing additional loans. This system can smooth out financial fluctuations triggered by local market conditions, as the sale of mortgages helps to balance the demand and supply across different regions.

When local real estate markets face downturns, such as in times of economic recession or overbuilding, the presence of a robust secondary market can help to stabilize financing options and maintain the flow of credit. It serves to buffer the impacts of localized economic challenges, ensuring that broader access to financing remains available, regardless of regional issues.

The other options, while related to the functioning of the mortgage market, do not reflect the primary purpose of the secondary mortgage market as effectively. For instance, increasing competition among lenders and reducing the number of foreclosures are beneficial outcomes but are not the core reason for the market's establishment. Similarly, encouraging home ownership is a vital objective of the housing policy in general, yet it ties back to the availability of mortgage products rather than being the specific purpose of the secondary market itself.