A secondary mortgage market is a marketplace created to give lenders a steady source of money to lend.
What Is The Secondary Mortgage Market?
The secondary mortgage market is a marketplace where lenders and investors buy and sell mortgages and servicing rights.
The secondary mortgage market is where your mortgage money gets sent after you’ve paid it. The mortgage lender puts together several loans from the primary mortgage market and sells them to investors such as pension funds, insurance companies, and hedge funds as Collateralized Mortgage Obligations (CMOs) or Mortgage-backed Securities (MBS).
It is a marketplace created to give lenders a steady source of money to lend. For instance, when a person takes a mortgage loan, the bank would use its readily available funds to grant the loan. Since the bank serves numerous customers who may need a loan, they cannot afford to run out of funds. So the bank would sell the loan taken on the secondary mortgage market to replenish their funds.
There are some pros associated with the secondary mortgage market. They include:
- Creates liquidity: The secondary mortgage market creates liquidity, ensuring that lenders always have money to lend out.
- 2. Enables longer terms: Without the secondary mortgage market, long-term loans such as 15 years or more would not be feasible.
- Low cost: The secondary mortgage market sometimes helps lower costs for borrowers.
As with almost everything with pros, there are also cons associated with the secondary mortgage market. They include:
- Foreclosure risks: Borrowers are at risk of foreclosures on their homes if they cannot pay.
- Mortgage loan denials: Requirements set by the secondary mortgage market may cause a lender to deny borrowers with low credit scores access to loans.
Secondary Mortgage Market Example
The secondary mortgage market operates behind the scenes. Even though many borrowers are oblivious of its existence, its influence extends to the primary mortgage market. For instance, a bank’s willingness to sign off on your mortgage loan request results from the condition in the secondary mortgage market.
A bank grouped multiple loans and sold these loans to a pension fund.« Back to Glossary Index