What Is The Secondary Mortgage Market?
The secondary mortgage market is the market where mortgages are bought and sold as investments. It acts as a mechanism that allows investment capital to fund the mortgages and loans that are used to finance the purchase of real estate.
What Is The Difference Between The Primary Mortgage Market And The Secondary Mortgage Market?
In the primary mortgage market, residential and commercial mortgages are created when banks lend money to borrowers for the purchase or refinancing of real estate. Mortgages are said to be originated in the primary mortgage market. Once these mortgages exist, they are resold on the secondary mortgage market to investors.
What Is The Importance Of The Secondary Mortgage Market?
Banks, financial institutions, and other loan originators do not necessarily keep the mortgages they issue. Instead, they sell their mortgages on the secondary mortgage market to investors. When they sell their mortgages on the secondary mortgage market, they hopefully earn money and gain more capital to lend again.
The existence of a secondary market for mortgages as investments reassures investors for a source of liquidity. For this reason, the secondary mortgage market is key to providing liquidity to finance the purchase of real estate on the primary mortgage market.
How Are Mortgages Sold On The Secondary Market?
Residential and commercial mortgages can be sold as whole loans. However, multiple mortgages can be pooled together and shares in the mortgage pool can be sold as investments. This process is known as securitization.
As a security, shares in the mortgage pool are sold to investors. Since these shares are secured by the underlying mortgages, they are known as mortgage backed securities. If the underlying mortgages or loans on commercial properties, the securities are known as commercial mortgage backed securities. This process facilitates the sale of investments and is a key factor in the functioning of the secondary mortgage market.
What Is The Difference Between Residential and Commercial Mortgages On The Secondary Mortgage Market?
Residential and commercial mortgages are very distinct from one another. The volume of residential mortgages is enormous. The ability to service residential mortgages is dependent on the capacity of the home buyer. Residential mortgages also benefit from government programs, insurance, and institutions such as Fannie Mae to manage risk and support the secondary mortgage market for these loans.
Commercial mortgages are based on the underlying commercial properties' ability to generate income to service the mortgage. Commercial mortgages do not benefit from the same government programs and initiatives as residential mortgages. Consequently, residential mortgages and commercial mortgages have very separate and distinct characteristics as investments.