Real Estate PL Topic - Primary Mortgage Market and Secondary Mortgage Market

Primary Mortgage Market and Secondary Mortgage Market

Primary Mortgage Market

The primary mortgage market is made up of the lenders that originate mortgage loans. These lenders make money available directly to borrowers. From a borrower’s point of view, a loan is a means of financing an expenditure; from a lender’s point of view, a loan is an investment. All investors look for profitable returns on their investments. Income on a loan is realized from the following two sources:

• Finance charges collected at closing, such as loan origination fees and discount points
• Recurring income, the interest collected during the term of the loan

Major lenders of home mortgage and commercial property loans include the following:

• Savings associations (also called thrifts) and commercial banks
• Insurance companies
• Credit unions
• Pension funds
• Endowment funds
• Investment group financing
• Mortgage banking companies
• Mortgage brokers

Secondary Mortgage Market

In addition to the primary mortgage market, where loans are originated, there is a secondary mortgage market in which loans are bought and sold only after they have been funded. The secondary mortgage market thus helps lenders raise capital to make additional mortgage loans and is especially useful when money is in short supply. By freeing capital for additional loans, the secondary market stimulates both the housing construction market and the mortgage market. The lender benefits, not only by raising additional capital, but also by avoiding interest rate risks on adjustable rate loans when interest rates fall, as well as on fixed rate loans if interest rates rise, and by making a profit on the sale. In addition, the lender may continue to service the loan and collect a fee for that service.

In the secondary market, a number of mortgage loans are assembled into blocks called pools. The mortgages can be pooled by the lender who sells them or, more frequently, by the organization that purchases them. Securities that represent shares in these pooled mortgages are then sold to investors or other organizations. The key players in the secondary mortgage market were created by the federal government in the decades following the Great Depression and World war II to help increase loan opportunities for homebuyers. They are referred to collectively as government-sponsored enterprises (GSEs):

• Fannie Mae – Conventional, FHA-insured, VA-guaranteed loans
• Freddie Mac – Mostly conventional loans
• Ginnie Mae – Special assistance loans

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