In a Secondary Mortgage Market, transactions involving the buying and selling of mortgage loans and servicing rights are carried out between mortgage originators, mortgage aggregators and investors. The Secondary Mortgage Market can be described as highly liquid and extremely large.
A huge portion of newly sourced mortgages are sold to their originators into the secondary market, where they are wrapped up with mortgage-backed securities and offered to investors to buy such as hedge funds, insurance companies, and pension funds. With the Secondary Mortgage Market, credit can be made equally available to all borrowers across different geographical locations.
The revenue from Secondary Mortgage Market provides banks with new funds to supply more mortgages. Before the setting up of Secondary Mortgage Market, only bigger banks with bottomless sources of money could afford to keep funds tied up for the life of a loan, i.e. 15 to 30 years. Consequently, potential home lenders found it increasingly difficult to locate mortgage lenders. In addition, high rates could be charged by the lenders as a result of little to no competition.
Government sponsored enterprises, Fannie Mae and Freddie Mac, were created by the 1968 Charter Act, and were used to buy bank mortgages and resell them to other investors at a profit. This was how the problem facing Secondary Mortgage Market was solved. However, the loans were not individually sold however. They were boxed up with mortgage, backed securities. Therefore, their value is secured or supported by an unseen group of mortgages.
Fannie Mae and Freddie Mac both owned or guaranteed 40% of all mortgages in the US before the subprime mortgage problem. Certain banks such as Lehman Brothers, Bear Sterns, among others got toppled by mortgage backed securities and private banks exited the mortgage market together. The two therefore became responsible for almost 100%.
Before the subprime mortgage crisis, the two owned or guaranteed 40% of all U.S. mortgages. As Lehman Brothers, Bear Stearns and other banks were affected by mortgage-backed securities and more in the financial crisis of 2008, almost all private banks left the mortgage market at the same time. Consequently, Fannie and Freddie became responsible for nearly 100%, basically supporting the entire housing industry.
It was until 2013 before banks started to return to the secondary market. Even at that, they are still holding on to about 27% of mortgages issued in 2014. This is due to three reasons:
The Primary Mortgage Market is the initial marketplace for the borrower and the mortgage originator to get together to conduct a mortgage transaction. The mortgage originator could be a credit union, a bank or a mortgage broker. After an agreement has been reached, the borrower is then provided the funds by the mortgage lender, which he then uses to complete the purchase on a new home.
Depositors provide money for banks and savings and loan associations. The loans given out by mortgage associations are valuable because they are expected to return with specific amounts of principal and interest. In addition, they are backed up by a mortgage which makes the lenders able to sell off the properties for unpaid debts. The secondary market lender therefore pay the primary market lenders for such mortgage loans, providing new money which the bank can lend to a new group of people interested in purchasing a home.
The borrowers’ payments go to the secondary market institutions after the loans are acquired by the secondary mortgage market. Nevertheless, a fee for servicing the loan is frequently retained by the primary mortgage market, or monthly payments are collected by the primary mortgage market and sent on to the secondary markets.
The secondary mortgage market is helpful for individuals intending to acquire a business loan, a car loan or credit cards. For people with credit scores higher than 720, getting a loan at the secondary mortgage market is a straightforward process. Lower credit scores need to first be repaired before a loan can be applied for.
Secondary mortgage market is beneficial for economic growth as well. According to Gross Domestic Product measurements, consumer spending generates almost 70% of the US economy. 2007 records show many consumers used credit cards to shop and when the financial crises was over, they cut back on debt or were denied by panicked banks from accessing loans. Improved securitization from secondary mortgage markets means investors and banks are no longer driven by fear, and consumer debt leads to higher economic growth.
There are three major players and one minor player in the secondary mortgage market. They are organisations associated with the federal government, directly or indirectly.
This is the leading purchaser of mortgages in the secondary market. It is a privately owned corporation chartered by Congress. Fannie Mae sets limits on specific amounts of mortgage loans bought and loans that go above such limits are referred to as jumbo loans.
This government is administered by the US Department of Housing and Urban Development, with Ginnie Mae, investors are provided with an opportunity to make investments in mortgages by selling investors pass-through certificates. The certificates represent the investments put into the program by the investors. Ginnie Mae works majorly in tandem with Fannie Mae in activities relating to the secondary mortgage market.
This corporation is also privately owned and provides secondary market for mortgages. It also sells bonds to make funds available for the purchase of mainly conventional mortgages.
Farmer Mac or the Federal Agricultural Mortgage Corporation serves as a secondary mortgage market for loans associated with agriculture and farming.
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