Secondary Mortgage Market

Secondary Mortgage Market

What is the secondary mortgage market?

The secondary mortgage market is where home loans and servicing rights are bought and sold between lenders and investors. A large portion of newly generated mortgages is sold on the secondary market by lenders that issue them, packaged as mortgage-backed securities, and sold to investors such as pension funds, insurance companies, and hedge funds.

The secondary mortgage market is massive and extremely liquid, helping to make credit equally accessible to all borrowers in every geographic location.

KEY TAKEAWAYS

  • The secondary mortgage market is where various entities buy and sell mortgage loans and servicing rights.
  • Several players are involved in the secondary mortgage market: mortgage originators
  • (who create the loans), mortgage aggregators (buying and securitizing loans), securities dealers/brokers (selling securitized loans), and finally investors (buying securitized loans for interest income).
  • The secondary mortgage market is massive and extremely liquid, helping to make credit equally accessible to all borrowers in every geographic location.

The secondary housing loan market explained

Several players participate in the secondary mortgage market: mortgage originators, mortgage aggregators (securitizers), and investors.

When a person applies for a home loan, the loan is underwritten, funded, and serviced by a financial institution (usually a bank). Banks are known as home loan originators and they make loans with their funds, but they cannot risk eventually running out of funds, so they tend to sell loans on the secondary market to replenish available funds so they can continue to pay Other clients provide financing. Depending on their size and complexity, mortgage originators may aggregate mortgages sometime before selling the entire loan package; they may also sell these loans at the time of individual loan origination.

One or more loans are usually sold to large integrators. The aggregator then distributes thousands of similar mortgage-backed securities over a specific period. The mortgage-backed securities are sold to securities dealers after inception (and sometimes before, depending on the type of mortgage-backed securities). The dealer, usually a Wall Street brokerage, further packages mortgage securities in various ways and sells them to investors, who often seek yield-oriented instruments. These investors have no control over mortgages, but they do earn interest income from borrowers’ repayments.

History of the Secondary Mortgage Market

Before the secondary market was established, only the larger banks had sufficient funds to provide the funds required for loan terms (usually 15 to 30 years). Because of this, it’s harder for potential home buyers to find mortgage lenders. Because there is less competition among mortgage lenders, they can charge higher interest rates;

The passage of the Charter Act of 1968 created; Fannie Mae &; Freddie Mac These government-sponsored businesses acted as integrators, able to purchase bank mortgages and resell them to other investors. Instead of resale loans individually, they are bundled into mortgage-backed securities, meaning their value is secured or backed by the value of the underlying loan bundle;

Competition and Risk in the Secondary Mortgage Market

Competition and risk are always part of the game when private investors bring mortgages into the secondary mortgage market as private investors start to push mortgage rates and fees. This means that if you have a low credit score & seek a loan, you may be considered risky, so they will charge higher interest rates and fees;

After the subprime mortgage crisis, individual investors became increasingly reluctant to put their money into low-interest mortgage-backed securities. The federal government then had to step in to fill a void in the secondary mortgage market. This has prevented house prices from skyrocketing to the point where almost no one can afford a home.

By Master James

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