Secondary Mortgage Market | Propertylogy

Secondary Mortgage Market

By on May 22, 2019

The secondary mortgage market is the financial market where mortgages and collateralized debt are sold to investors.

When a lender closes a loan with a borrower, that is the primary mortgage market they operate in which consist of borrower (mortgagor) and lender (mortgagee).

These days, almost all the home loans closed by lenders are in turn, sold on the secondary markets to investors. Effectively making them secondary mortgage loans.

For example, correspondent lenders are known to underwrite loans that would be liquid on the secondary market. They then effectively try to sell the loans they originate as soon as they are closed either directly in the securities market or to a bigger lender who packages them into MBS for sale.

This is to reduce risks and improve liquidity.

Even a loan that a lender has held for years can be sold to a third party investor.

Buyers could include institutional investors, fund managers, and even other commercial banks.

Mortgage loans are usually packaged into groups known as collateralized mortgage obligations (CMO) or mortgage-backed securities (MBS) or collaterized debt obligations (CDO).

So buyers of these products in effect, are getting a whole basket of mortgage debt.

This effectively means that investors and institutions who purchase these securities would receive regular repayments from borrowers as income.

However, buyer might also buy up whole loans. Effectively taking over the servicing rights of the debt.

The rise of the secondary mortgage markets have played a prominent role in helping the average home owner purchase his dream home.

Because lenders no longer have to hold onto the risks of lending since they would sell the loans to others, they can be more comfortable with approving more home loans and at higher loan quantums.

This enable consumers to buy bigger houses. Sometimes way beyond their financial means.

However, this has also led to irresponsible lending and have been credited as a main reason for the financial crisis of 2008 to occur.

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