Secondary Mortgage Market Explained

The secondary mortgage market is a marketplace for the sale of securities or bonds backed by mortgage loans. Many loans are pooled together and sold as collateralized mortgage obligations (CMOs) or mortgage-backed securities (MBS) to investors such as pension funds, insurance companies, and hedge funds by a mortgage lender, commercial bank, or specialized organization. Collateralized debt obligations (CDOs) were frequently formed by combining mortgage-backed securities with other types of financial obligations, such as business loans.

Secondary Mortgage Market Process

A financial institution, typically a bank, underwrites, funds, and services a home loan when it is taken out. Banks, also known as mortgage originators, use their own capital to issue the loan, but because they can’t risk running out of money, they frequently sell the loan on the secondary market to replenish their available cash, allowing them to continue to offer financing to other clients. A mortgage originator may aggregate mortgages for a period of time before selling the entire package, or it may offer individual loans as they are originated, depending on its size and sophistication.

Large aggregators are frequently sold the debt or loans. Thousands of such loans are subsequently distributed by the aggregator as a mortgage-backed instrument (MBS). An MBS is sold to a securities dealer after it has been formed (and occasionally before it has been formed, depending on the type of MBS). This dealer, which is frequently a Wall Street brokerage business, packages the MBS in various ways and sells it to investors who are looking for income-producing securities. These investors do not own the mortgages, but they do receive the interest payments made by the borrowers.

Secondary Mortgage Market Summary

• The secondary mortgage market is a market where diverse businesses buy and sell mortgage loans and servicing rights.
• Mortgage originators (who produce the loans), mortgage aggregators, securities dealers/brokers (who sell the securitized loans), and finally, investors all participate in the secondary mortgage market (who buy the securitized loans for their interest income).
• The secondary mortgage market is exceptionally big and liquid, allowing credit to be made available to all borrowers regardless of geography.

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