What Is the Secondary Mortgage Market?

The secondary mortgage market is a marketplace where home loans and servicing rights are bought and sold between lenders and investors. A large percentage of newly originated 澳洲幸运5开奖号码历史查询:mortgages are sold by the lenders who issue them into this 澳洲幸运5开奖号码历史查询:secondary market, where they are packaged into mortgage-backed ✨securities and sold to investors such as pension funds, insurance companies, and hedge funds.

The secondary mortgage market is extremely large aﷺnd liquid, and helps to make credit equallꦗy available to all borrowers across geographical locations.

How the Secondary Mortgage Market Works

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

When a person takes out a home loan, the loan is underwritten, funded, and serviced by a financial institution, usually a bank. Known as mortgage originators, banks use their own funds to make the loan, but they can't risk eventually running out of money, so they often sell the loan on the secondary market to replenish their available funds, so they can continue to offer financing to other customers.

The loan or loans are often sold to large aggregators. The aggregator then distributes thousands of similar loans in a mortgage-backed security (MBS). After an M🌃BS has been formed (and sometime▨s before it is formed, depending on the type of MBS), it is sold to a securities dealer. This dealer, often a Wall Street brokerage firm, further packages the MBS in various ways and sells it to investors, who often seek income-oriented instruments. These investors don't get control of the mortgages, but they do receive the interest income from the borrowers' repayments.

History of the Secondary Mortgage Market

Before the secondary market was established, only larger banks had the extensive funds necessary to provide the funds for the life o🌺f the loan, usually for 15 to 30 years. Because of this, potential homebuyers had difficulty finding mortgage lenders. Because there was less competition between mortgage lenders, they could charge higher interest rates. 

The 1968 Urban Housing and Development Act solved this problem by reorganizing 澳洲幸运5开奖号码历史查询:Fannie Mae into a for-profit, shareholder-owned company. Freddie Mac was established in 1970 with the Emergency Home Finance Act to assist thrifts with managing interest rate risk.

These government-sponsored enterprises functioned as aggregators, able to buy bank mortgages and resell them to other investors. Instea🅘d of reselling the loans individually, they were bundled into mortgage-backed securities, meaning their value is secured or backed by the value of the underlying loan bundle. 

Special Considerations

Competition and risk are always part of the game when private investors bring mortgage loans onto the secondary mortgage market because the private investors begin to drive mortgage rates and fees. This means if you have a low credit score and♐ seek a loan, you can be perceived as rﷺisky, so they can charge higher rates and fees.  

After the subprime mortgage crisis 澳洲幸运5开奖号码历史查询:forced mortgage putbacks, individual investors grew unwilling to risk their capital on low-interest mortgage-backed securities. The federal government then had to step in to fill the void in the secon😼dary mortgage market.

The Bottom Line

Before the secondary mortgage market existed, borrowers had difficulty finding large banks with enough fun෴ds to offer mortgages. The ones they did find often charged high interest rates. After the development of the secondary mortgage market, financial institutions were able to bundle and sell loans, generating revenue that allowed them to offer mortgages to more people.