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While most real estate agents represent buyers and sellers in the primary real estate market, where home loans are obtained from lenders, a secondary mortgage market exists where servicing rights and home loans are purchased and sold between investors and lenders. This is a complex market that few mortgage owners are even aware of. The purpose of this mortgage market is to remove a considerable amount of the risk that the lender takes on when holding a mortgage.
Once a lender provides a borrower with a home loan, they can then choose to sell the loan through the secondary mortgage market. When working as a real estate agent, it's highly recommended that you understand this market to properly educate buyers who ask about it. Here is a detailed look at the secondary mortgage market and why it's important for REALTORS® to understand.
How the Secondary Mortgage Market Works
The secondary mortgage market is a marketplace where investors, lenders, and buyers connect to buy and sell mortgages. There are four key steps in the secondary mortgage market.
1. A Buyer Takes Out a Mortgage
The initial step of this process occurs when a buyer purchases a mortgage directly from a lender, usually a bank. This step is called the mortgage origination phase, which means the buyer must meet certain requirements before closing on a loan. In most scenarios, closing on a mortgage loan will take anywhere from 30-60 days, depending on how well the underwriting process goes.
2. The Lender Sells the Loan
The second step in the secondary mortgage market involves the lender selling the loan. Once the mortgage is officially originated, the company or lender that provided the borrower with the loan can either hold onto the loan or choose to sell it via the secondary mortgage market. It's common for lenders to sell mortgages to reduce the amount of risk that's on their books. Once the lender sells the mortgage, they can earn back the money they loaned, enabling them to sell more mortgages.
3. Agencies Purchase Loans on the Secondary Mortgage Market
Next, government agencies or government-sponsored enterprises (GSEs) purchase multiple loans. It's exceedingly common for these enterprises to purchase numerous loans from lenders to profit from the interest that accumulates over time. In this scenario, a GSE will package many mortgages into mortgage-backed securities (MBSs).
Keep in mind that every mortgage that gets placed in a single mortgage-backed security must have similar borrower criteria. In short, that means mortgages that go into an MBS have similar borrower financial characteristics and perceived risks.
4. Investors Purchase MBSs
The fourth and final step occurs when investors purchase mortgage-backed securities from the agencies mentioned previously. A GSE will sell mortgage-backed securities to investors through shares. An investor can purchase any number of shares in an MBS to take advantage of the interest these securities gain over time. These securities are considered safe investments since investors are guaranteed a return on the MBS once the purchase has been made.
Key Players in the Secondary Mortgage Market
Typically, four entities are heavily involved in the secondary mortgage market.
Banks and Credit Unions (Lenders/Originators)
Mortgage originators create home loans, meaning the secondary mortgage market wouldn't exist without mortgage originators. Once the loan has originated and the home sale has closed, mortgage originators can keep the loan on their books or sell them to replenish funds and continue to issue more mortgages.
Mortgage Aggregators
Another key player in the secondary mortgage market involves issuers of mortgage-backed securities. These issuers include Wall Street firms as well as Freddie Mac, and Fannie Mae, the latter two of which are the largest mortgage associations in the US. Mortgage aggregators are responsible for purchasing a high number of loans before packaging these loans into mortgage-backed securities that can be sold to institutional or individual investors.
Government-sponsored enterprises differ from mortgage originators because they aren't responsible for lending money to the public. Instead, these enterprises can guarantee and buy loans through the secondary market. Some of the loans purchased on the secondary mortgage market are bought directly by the government, which occurs with VA and FHA loans.
Securities Dealers
A securities dealer is a firm or individual who specializes in securing various market transactions. This entity will assist government-sponsored enterprises in issuing securities by underwriting and eventually placing them on the market. Securities dealers are responsible for providing the prices of securities that investors see when they search the market for new securities to invest in. An investor can't purchase an MBS without a securities dealer being involved.
Investors
Individual and institutional investors commonly purchase mortgage-backed securities because of the safety of these loans. Since mortgage-backed securities are effectively supported by the properties these loans cover, they are considered relatively safe investments. An MBS usually comes with a relatively high interest rate that will allow the investor to earn consistent returns over an extended period.
Benefits of the Secondary Mortgage Market
There are many benefits associated with the secondary mortgage market. These benefits are available to consumers, investors, and lenders. The main advantages of the secondary mortgage market for consumers include:
- Easier access to the funding needed to purchase a home
- Lower interest rates
- Lengthier loan terms, which allow for lower monthly mortgage payments
If the secondary mortgage market didn't exist, lenders would be unable to provide as many loans. They would also shoulder more risk, meaning that the loan terms and interest rates would almost certainly be worse for the consumer. Lenders gain profitability and liquidity as a result of the secondary mortgage market.
By selling off the loans they provide, lenders can obtain the cash they need to make additional loans. Investors also benefit from the secondary mortgage market by gaining access to a relatively safe investment that produces interest income.
Why the Secondary Mortgage Market Matters for REALTORS®
Even though the key players in the secondary mortgage market involve investors, lenders, and mortgage aggregators, REALTORS® should also stay up to date on the secondary mortgage market and any changes that might occur. If ever the secondary mortgage market weakens, consumers could be directly impacted.
By understanding what the secondary mortgage market is, you can be a resource for buyers who might have questions about this market. You'll also be able to inform buyers that their mortgage may be sold and moved over to a new servicer. So, if your client wants their mortgage to remain local, you can encourage them to ask the lender about secondary mortgage market participation before going through with the loan origination process.
The National Association of REALTORS® (NAR) promotes the secondary mortgage market as a source of reliable and affordable mortgage capital for consumers. It supports fostering competition in the market and preserving the 30-year fixed-rate mortgage for Americans.
The NAR's imagined reforms include everything from re-chartering Fannie Mae and Freddie Mac as privately held utilities to creating sensible underwriting standards. The NAR offers resources for REALTORS®, including housing finance reform talking points and a working paper on the vision for housing finance reform. Ultimately, the NAR's vision aims to ensure Americans' ongoing access to mortgage capital and to support the secondary mortgage market as an essential element in making that happen.