Inside The Secondary Mortgage Market
BATTLECALL GUEST EXPERT: Mary Ann Lewis, Mortgage
Fit
The borrowers mainly are concerned with only getting their loans approved.
They don't really think as to what happens to these loans or how the lenders can
afford to lend you so much of money. Here we attempt a detailed study of these
factors with reference to the secondary mortgage market.
The mortgage market works in a cycle. There are basically two
markets:
- Primary mortgage market
- Secondary mortgage market
The primary mortgage market involves two broad categories:
- The mortgage originators: this comprises depository institutions like
commercial banks and thrifts and non-depository institutions like mortgage banks
and brokers.
- The Secondary market conduits: this comprises the three GSEs-Freddie Mac,
Fannie Mae and Ginnie Mae , and other private investment banks
This is where the loan portfolios are held and then sold to the secondary
market. In simple words the loans that you take are accumulated with details and
they are sold to the big wigs. The next question would automatically be:
What happens in the secondary market and why are the loans sold in the first
place?
The loans are sold in the secondary mortgage market to investors.
This is done in three ways:
- The loans are sold individually-this happens especially with large loans
- The loans of the same type, meeting the same underwriting standards are
pooled together into Mortgage backed securities (MBS).
- Bonds are sold which are backed by the loans.
The monthly payment that you make to your lender is actually transferred to
the GSEs and they pass it on to the investor market. But the last transaction
involves a cut; the guarantee fee is deducted and allowed into the market.
At Wall Street investors buy these loans either whole or packaged and
accordingly the loans are financed. These transaction costs need to be borne by
the borrowers. But the benefits that the secondary market reaps offset these.
Benefits of the secondary mortgage market:
- Reduces the interest rate
- Maintains liquidity
- Restructures portfolios
- Distributes risk
- Increases the homeownership
- More home mortgages are made available
- Provides financial stability to lending institutions
- Fosters economic growth
- Provides more employment opportunities
- Attracts foreign capital markets to invest
The mortgage market earlier allowed only conventional loans to be sold but
today the scenario is changing. Even sub-prime loans are gaining entry and they
are helping the loan originators to fund more such loans .This cycle is
essential to the very sustenance of the mortgage industry.
Thus it all depends on the investors and how much they buy and what price
which defines the well being of the mortgage field.
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