Secondary Mortgage Market Enhancement Act (SMMEA)

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Julia Kagan
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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

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Updated March 30, 2022
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Doretha Clemon
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Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder.
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Skylar Clarine
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What Is the Secondary Mortgage Market Enhancement Act?

The Secondary Mortgage Market Enhancement Act (SMMEA) is an act passed in the United States in 1984 to meet a growing demand for mortgage credit that could not be otherwise met by existing federal agencies. The SMMEA allowed federally chartered and regulated financial institutions to invest in mortgage-backed securities. It also overrode state investment laws to enable state-chartered and -regulated institutions to invest in these securities. The act made a major contribution to the exceptional growth of the residential mortgage market in subsequent decades. It also contributed to the housing market crisis that began in 2007.

Understanding the Secondary Mortgage Market Enhancement Act (SMMEA)

The Secondary Mortgage Market Enhancement Act was created in response to concerns about the future of the housing industry. One of the principles behind it is that private mortgage-backed securities should not be in competition with government mortgage-backed securities. Instead, they should compete with other private investments such as mutual funds.

The SMMEA succeeded in strengthening the secondary mortgage market. As mortgage-backed securities became widely available, they attracted more and more investors. Since the act overrode state laws, it allowed investment even in states that had statutory limitations on mortgage-backed securities. This growth in investment resulted in a larger pool of money available for homebuyers. It also gave homebuyers a greater variety of loan options. More Americans were able to purchase homes as a result of the SMMEA.

The Secondary Mortgage Market Enhancement Act and the 2007 Housing Market Crisis

The investment and loan possibilities created by the Secondary Mortgage Market Enhancement Act ultimately contributed to the collapse in the U.S. housing market starting in 2007. This collapse was precipitated by a confluence of factors, including mortgage-backed securities receiving higher credit ratings from rating agencies than was warranted by their holdings.

Mortgage-backed securities are created when a mortgage lender sells mortgages to a pool sponsor, who then assigns them to a trustee. Investors buy certificates and receive payments generated by the mortgage pool. The initial lender continues to service the pool's underlying mortgages and collects monthly payments. The trustee pays a service fee to the lender in return for the proceeds, which then get distributed to investors.

Prior to the 2007 collapse, many mortgage-backed securities were pooled with lower-quality subprime mortgages. Rating institutions often gave these relatively risky pools high ratings, which encouraged high levels of investment. At the same time, lenders were offering loans to unqualified borrowers. Many borrowers ended up defaulting. The defaults eventually resulted in the collapse of the secondary mortgage market, which had a ripple effect in the overall economy.

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  1. U.S. Government Publishing Office. "Secondary Mortgage Market Enhancement Act of 1984," Sec. 106, Pages 1691-1692. Accessed April 9, 2021.

  2. Boston University Law Review. "Toward a More Perfect Substitute: How Pressure on the Issuers of Private-Label Mortgage-Backed Securities Can Improve the Accuracy of Ratings," Pages 1919-1920. Accessed April 9, 2021.

  3. La Salle University. "How Mortgage Fraud Helped Facilitate the 2008 Housing Crisis," Pages 4-5. Accessed April 9, 2021.

  4. Fordham Urban Law Journal. "Section 106 of the Secondary Mortgage Market Enhancement Act of 1984 and the Need for Overriding State Legislation,” Page 690. Accessed April 9, 2021.

  5. National Association of Insurance Commissioners. "Financing Home Ownership: Origins and Evolution of Mortgage Securitization Public Policy, Financial Innovations and Crises," Pages 108-109. Accessed April 10, 2021.

  6. University of Minnesota Law School, Scholarship Repository. "Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities?" Page 585. Accessed April 9, 2021.