Secondary Mortgage Market Definition

What Is the Secondary Mortgage Market?

The secondary mortgage market is a market the place dwelling loans and servicing rights are purchased and offered between lenders and traders. A big proportion of newly originated mortgages are offered by the lenders who situation them into this secondary market, the place they’re packaged into mortgage-backed securities and offered to traders comparable to pension funds, insurance coverage corporations, and hedge funds.

The secondary mortgage market is extraordinarily massive and liquid, and helps to make credit score equally accessible to all debtors throughout geographical places.

Secondary Mortgage Market Defined

A number of gamers take part within the secondary mortgage market: mortgage originators, mortgage aggregators (securitizers), and traders.

When an individual takes out a house mortgage, the mortgage is underwritten, funded, and serviced by a monetary establishment, normally a financial institution. Often called mortgage originators, banks use their very own funds to make the mortgage, however they can not danger ultimately working out of cash, in order that they typically will promote the mortgage on the secondary market to replenish their accessible funds, to allow them to proceed to supply financing to different clients. Relying on its measurement and class, a mortgage originator may mixture mortgages for a sure time period earlier than promoting the entire bundle; it may additionally promote particular person loans as they’re originated.

The mortgage or loans is commonly offered to massive aggregators. The aggregator then distributes 1000’s of comparable loans in a mortgage-backed safety (MBS). After an MBS has been fashioned (and typically earlier than it’s fashioned, relying upon the kind of the MBS), it’s offered to a securities supplier. This supplier, typically a Wall Road brokerage agency, additional bundle the MBS in numerous methods and promote it to traders, who are sometimes searching for income-oriented devices. These traders do not get management of the mortgages, however they do obtain the curiosity earnings from the debtors’ repayments.

Historical past of the Secondary Mortgage Market

Earlier than the secondary market was established, solely bigger banks had the intensive funds vital to supply the funds for the lifetime of the mortgage, normally for 15 to 30 years. Due to this, potential homebuyers had a harder time discovering mortgage lenders. As a result of there was much less competitors between mortgage lenders, they had been in a position to cost larger rates of interest. 

The 1968 Constitution Act solved this downside by creating Fannie Mae and Freddie Mac, which really began working two years later. These government-sponsored enterprises functioned as aggregators, in a position to purchase financial institution mortgages and resell them to different traders. As a substitute of reselling the loans individually, they had been bundled into mortgage-backed securities, which suggests their worth is secured or backed by the worth of the bundle of underlying loans. 

Competitors and Threat on the Secondary Mortgage Market

Competitors and danger are at all times a part of the sport when personal traders deliver mortgage loans onto the secondary mortgage market as a result of the personal traders start to drive mortgage charges and charges. This implies you probably have a low credit score rating and search a mortgage, you could be perceived as dangerous, so they will cost larger charges and charges.  

After the subprime mortgage disaster, particular person traders grew unwilling to danger their capital on mortgage-backed securities with low charges. The federal authorities then needed to step in to fill the void within the secondary mortgage market. This stopped charges from skyrocketing to a spot the place hardly anybody may afford to personal a house.