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- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Secondary Mortgage Market
Most homebuyers and homeowners only know one spectrum of the mortgage market where you take out a mortgage or refinance from a lender which is known as the primary market.
However, what happens once you close your loan with your lender? Well, a whole lot is happening once you close on your loan in a secondary mortgage market. In this post, we will learn more about this market in detail.
What Is The Secondary Mortgage Market?
The secondary mortgage market is where the mortgage servicing rights are sold by the mortgage lenders and originators to the investors so that they have enough money to lend to more prospective borrowers.
For example, if a lender has $500,000 and gave that to two borrowers to buy a home, they won’t have any more money to lend to any future prospective borrowers.
In this case, the lender will sell these two mortgages to the secondary market for a fee. This will ensure that the lender has more than $500,000 to lend to the prospective borrowers.
Detailed Explanation For Secondary Mortgage Market
The secondary market helps the lenders to have enough funds available to lend to the borrowers across the country.
All the mortgages from the primary market are bundled in something called mortgage-backed securities.
Major portions of these mortgage-backed securities are held by two giant government-sponsored enterprises, Fannie Mae and Freddie Mac.
These government-sponsored enterprises will sell these mortgage-backed securities to the investors like insurance companies, hedge funds, pension funds, etc.
The secondary mortgage market consists of multiple parties like borrowers, lenders/originators, government-sponsored enterprises, and investors.
How Does A Secondary Mortgage Market Work?
It all begins when a borrower takes a mortgage from a lender. The lender will process the loan according to the guidelines and regulations set by government-sponsored enterprises like Fannie Mae and Freddie Mac.
The lender or the originator will package similar types of loans in one bundle and will decide if they want to service them for some time or sell it in the secondary market.
The government-sponsored enterprises Fannie Mae and Freddie Mac will purchase these bundles from multiple lenders and will bundle them into mortgage-backed securities.
Fannie Mae and Freddie Mac hold the MBS for all conventional mortgages. The same process is followed by Ginnie Mae for all the government mortgage loan programs like FHA, VA, and USDA.
These mortgage-backed securities are purchased by investors from government-sponsored enterprises like Fannie Mae, Freddie Mac, and Ginnie Mae.
The investors see a consistent money flow in these mortgage-backed securities as the borrowers make regular payments for the mortgage.
What Is The Difference Between Primary Vs Secondary Mortgage Market?
Primary Market:
A primary mortgage market is where a borrower approaches a bank to apply for a mortgage to purchase a home or refinance the current mortgage to lower payments or pull cash out of the home equity.
The lender will qualify the borrower based on a few parameters like credit score, debt to income, and loan to value.
The lender will take an application, qualify the borrower based on some important documents and will close and disburse the money to the borrower.
Once the borrower signs the dotted line the lender specifically the promissory note, which says that the borrower promises to pay the borrower every month with the interest agreed on the closing disclosure.
The lender will charge fees and points to the borrower through which they usually make money.
Secondary Market:
The lenders have limited funds when it comes to lending money to the borrowers. The lenders bundle a whole bunch of mortgage notes and sell them in the secondary market to the government-sponsored enterprises (Fannie Mae, Freddie Mac, Ginnie Mae).
This replenishes the lending funds for the lenders so that they can lend more money in the primary market and keep the lending market moving.
The government-sponsored enterprises will then sell these to international investors.
This minimizes the risk for the lenders and originators giving them additional opportunities to fund more loans.
Conclusion
The secondary mortgage market is a very large business of over trillions of dollars. This market ensures the smooth flow of the primary mortgage market in terms of funds availability.
Since the financial crisis of 2008, there have been many changes in the secondary market as to how the lenders are supposed to lend money to the borrowers which provides consistent money flow in the lending business.
