Once you get a mortgage, you may be expected to pay back your next lender. 15 or 30 years. However, many banks and other lenders originate from mortgages solely to sell to other investors. The secondary market plays a major role in your ability to get a mortgage and how much it costs, but many home buyers are unaware of it and how it works. Here’s what you need to know.
What is the secondary mortgage market?
The secondary mortgage market is a market where investors buy and sell securitized mortgages. That is, they are packaged in a bundle of many individual loans. Mortgage lender You will send out loans and place them for sale in the secondary market. Investors who purchase these loans will receive the right to collect unpaid money.
Like the securities market, the value of a mortgage in the secondary market depends on risk and potential returns. Highly risky loans should offer higher returns. interest rate.
Primary vs. Secondary Mortgage Market
The main mortgage market is where borrowers obtain mortgages from lenders. For example, if you go to a local credit union and several banks to get a mortgage estimate, you are participating in the major mortgage market.
The secondary mortgage market does not include borrowers at all. Instead, it’s where lenders sell loans they send to investors.
How the Secondary Mortgage Market Works
After the buyer receives the mortgage, the lender can sell it in the secondary mortgage market while continuing to serve the loan for the borrower. If you have a major mortgage and are on sale, there’s no need to worry as the terms of the loan and the terms of its services will not change.
Many lenders sell loans Government sponsored companies (GSES) Fannie Mae and Freddie Mac. Home loan-backed guarantee Hold them in (MBS) or in your book and attract interest from the borrower. only Applicable loan It can be sold to GSES as it must meet certain criteria set by the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie. These factors are:
- a Maximum loan amount Most markets for one-unit real estate are $806,500 (2025), but in some expensive housing markets (up to $1,209,750)
- Down payment for the size of the loan, typically at least 3%
- Borrower’s credit score, typically at least 620-650
- borrower Debt Income (DTI) Ratioideally it should be below 36%
Demand for conforming loans helps to push it down Mortgage fees For borrowers who can meet the criteria. note that Jumbo Loan,Because of the large size of the loan, it is not considered a loan conformance.
1. The borrower will take out the loan
Home buyers borrow money from lenders Get out a mortgage (Compliant loan). The home buyer receives cash to buy the home, and the lender maintains the buyer’s mortgage and promises to be paid at the specified interest rate.
2. Lenders sell the loan to an aggregator
Lenders sell their loans to mortgage aggregators – often Fannie May or Freddie MacThose who buy two-thirds of their mortgage in the US will get cash Mortgage sales Be careful, you can use your capital to create another loan. The lender may reserve the right to service a mortgage. This is a service that accepts fees.
Lenders are refraining from paying off their principal or interest mortgage – as the aggregator currently owns the loan after paying the cash.
3. Aggregators bundle loans with mortgage-backed securities
Like Fannie Mae and Freddie Mac, as conveners repeat the process of purchasing a conforming loan, they accumulate hundreds or even thousands of mortgages across the US. Next, create a bundle of these packages or “securitized.” These loans create loans to mortgage-backed securities (MBS) using the following methods:
- Combining 1,000 mortgages into one series of MBs makes it less risky than buying a single mortgage, just like mutual funds that invest in many companies.
- Build MBS into different types of investment products and sell “stops” to them.
- Create bonds in a very safe range, with lower payments for safer notes and higher payments for risky notes.
- Build payments to MBS bonds in ways that may appeal to certain investors. For example, many MBS pay interest only to investors, while some MBs may pay principals. Others pay for the combination.
Additionally, if an aggregator has also purchased mortgage service rights, they may retain them and servicing the underlying loan or selling it to a third party.
4. Investors buy securities
There are several investors groups that generally buy MB from aggregators. These include:
- Pension Fund
- Mutual funds
- Insurance Company
- Other income-oriented investors
When MBS is sold in cash, the aggregators usually use it to purchase additional mortgage notes for repackaging and resale. Investors can use MBS to hold and collect income (via mortgage payments) or sell to another investor.
Once MBS has matured and investors are paid back, they can buy another MBS or invest elsewhere.
Examples of the secondary mortgage market
Imagine taking out a mortgage to buy a new home. The lender will provide you with the funds to purchase the property and you agree to pay back the money over a certain number of years. But in the backend, the lender will sell your mortgage to the secondary market for cash, providing more funds to the lender.
Ultimately, what your lender decides to do with your mortgage will not affect you as a borrower, but there are some things that could happen to your loan if the loan is sold in the secondary mortgage market, including:
- Buyers will hold your mortgage and collect interest
- It is bundled with other mortgages and sold as security supported by mortgages
Why does the secondary mortgage market exist?
Creating an entirely new security from a mortgage is a complicated process. So why do players involved in the mortgage market do this?
- Specialization: Secondary markets allow financial companies to specialize in a variety of market sectors, allowing lenders to slice mortgages. For example, banks may send out loans, but sell them in the secondary market while maintaining the rights to mortgage services.
- Allow lenders to get their money back and lower the risk. Secondary mortgage market allows Loan Originator After you make money from the costs of the loan, you can sell the loan, get back the money you lend, sell the mortgage, and reduce your risk exposure. Even if a lender decides to maintain the loans he was born with, he will benefit from having an active, liquid secondary market where he can sell the rights to the loan and services.
- Investors can purchase MBSS: The secondary market allows investors to purchase mortgage-backed securities that pay a fixed interest rate, which is considered a relatively safe investment, and usually has a higher yield than US government bonds.
Overall, the secondary market benefits each economic player, including borrowers, investors, banks/lenders, aggregators, and rating agencies.
How the secondary mortgage market benefits home buyers
Home buyers benefit from lenders participating in the secondary mortgage market in the following ways:
- Keep mortgage rates low and fair
- Borrowers often allow refinances at any time without penalty
- Lenders can offer borrowers long loan terms
- Mortgage sales provide cash to lenders, so they allow them to offer more loans to potential home buyers
Pros and cons of the secondary mortgage market
Some of the advantages and disadvantages of the secondary mortgage market include:
Strong Points
- Low cost: Borrowers may benefit from lower costs due to the secondary mortgage market.
- Investors can choose a loan: Investors (including players from institutions such as banks, pension funds, and hedge funds) are exposed to certain types of securities that better meet their needs and risk tolerance.
- It keeps money moving: Lenders can maintain other loans that they like to maintain while moving certain loans out of the book. They can also use capital efficiently, generate fees for underwriting mortgages, selling mortgages, and again using capital to write new loans.
- Aggregators collect fees: Aggregators like Fanny and Freddie earn fees by building them with mortgage bondage and repackaging, and certain attractive traits.
Cons
- There may be risks: Mortgage-backed securities are not without risk. If borrowers default on loans, investors could lose money, which could damage the economy.
- Impact on returns: Investor returns can also be adversely affected if borrowers refinance or pay off their loans faster than expected.
- Strict Eligibility Standards: Because GSE has strict standards for what types of loans are guaranteed in the secondary market, lenders typically do not issue loans on any of these parameters. As a result, borrowers with low credit scores may not qualify for the loan.
Conclusion
The secondary mortgage market is a financial market in which investors and lenders buy and sell mortgages through mortgage-backed securities.
Lenders can benefit from selling their mortgages to the secondary market, reclaiming the money they originally lend, and providing more mortgages to borrowers. Investors, on the other hand, can make a profit by adding relatively safe investments to their portfolios.
The secondary mortgage market can also have a positive impact on home buyers as it keeps mortgage rates relatively low and fair, allowing lenders to offer long loan terms to pay off.
