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If you have one long term mortgage With favorable loan terms, the secondary mortgage market is due in part to this sweet deal.
“If the secondary market didn’t exist, it would be difficult for you to get a 30-year fixed-rate mortgage,” said Ron Haynie, senior vice president of mortgage financing policy for the Independent Community Bankers of America. “And if you could get one it would be a lot faster than it is today.”
If you lived through the 2008 financial crisis or saw the movie The big shortThen you may already know a little bit how it works. In short, in the secondary market, your lender could sell your mortgage after you take out the loan. The ability to outsource mortgages allows lenders to turn around and take out more credit.
Since changes in the secondary market can affect borrowers, it’s a good idea to understand the basics. Here’s what to know.
What is the secondary mortgage market and how does it work?
The secondary mortgage market is a marketplace where lenders sell mortgages and investors buy financial products that are backed by those mortgages. According to the Credit Union National Association, around two-thirds of US home loans are sold here. Here’s a quick example of how it works:
For example, suppose a bank is using its reserves to fund $ 10 million mortgages. “This type ties up their funds to be able to borrow more,” says Jordan van Rijn, senior economist at the Credit Union National Association. “But if they can sell those mortgages to the secondary market and get that money back, they can go ahead and keep borrowing more.”
Companies like Fannie Mae, Freddie Mac, and private companies buy these loans and package them in mortgage-backed securities. Then investors from all over the world buy these products and keep the cycle going.
The average home buyer may not know about the secondary market, says Nicole Rueth, director of production on the Rueth team at Fairway Independent Mortgage Corp. “Unless that fails,” she says. “It’s like I don’t have to know how a car engine works unless the car doesn’t start.”
However, it’s good to understand the basics as changes in the secondary market can occasionally affect you. For example Fannie Mae and Freddie Mac a new fee attached on some refinancing loans in late 2020, and many lenders decided to pass this fee on to homebuyers. “This is a step in the secondary market that has an immediate impact on the end user,” says Rueth.
Secondary mortgage market vs. primary mortgage market
You probably already know the primary mortgage market. This is where borrowers can take out a mortgage loan from a lender such as a bank or credit union. The lender then passes money on to the buyer.
After the lender has closed several mortgages, he has two options.
- Keep the home loan in his portfolio: Collecting interest on these mortgages offers diversification of investments.
- Sell the home loans on the secondary market: Repaying the money helps banks and credit unions fund loans for more borrowers. “Banks usually sell almost half of their mortgages on the secondary market,” says van Rijn. “Credit unions tend to hold more of their mortgages. They’re selling about 25%. “
Before the creation of the secondary mortgage market, loans remained in the primary market. Only larger banks had enough cash to finance mortgages for the life of the loan, and the lack of competition allowed lenders to charge higher interest rates. This excluded a lot of people from the buying process.
The US Congress created the secondary market in 1938 to “help increase liquidity,” says Haynie, “and it helped banks and lenders lower interest rates and manage credit risk. Now it has grown to a point where the mortgage market is extremely liquid because you can raise capital from all over the world. “
Here’s a quick rundown of what’s happening in each market and who is involved in it:
|Primary market||Second market|
|• Borrowers take out mortgages from lenders.
• Lenders such as banks and credit unions either sell loans to the secondary market or keep the loans on their books.
• Mortgage brokers help connect borrowers and lenders.
|• Lenders package and sell home loans in the secondary market.
• Mortgage aggregators buy and securitize the loans.
• Securities dealers and brokers sell the securitized loans.
• Investors buy the securitized loans and receive income from the interest.
Who buys secondary market loans?
Mortgage buyers in the secondary market fall into three main categories:
- Government Sponsored Enterprises (GSEs): Acquired from Fannie Mae and Freddie Mac conventional loans on the secondary market. When lenders plan to sell a loan to Fannie Mae or Freddie Mac, they must ensure that the borrower and loan meet certain “compliant” requirements set by those agencies.
- Government authorities: Government sponsored loans such as FHA loan, VA loans and USDA loanare invested in mortgage-backed securities through Ginnie Mae, a government agency.
- Private company: Some of these are pension funds, insurance companies, and hedge funds. “Your drawing criteria may be different from Fannie Mae and Freddie Mac’s,” says Haynie. “Some investors will specialize in loans where, for example, the borrower has a higher debt-to-income ratio.”
After buying a home, look out for a letter from your lender. Find out if the lender sold your mortgage and who is servicing your loan. If you’re still not sure who your loan belongs to, Check your credit reports.
What are Mortgage-Backed Securities?
Mortgage-backed securities are bonds that are backed by home and other real estate loans. When banks and credit unions finance mortgages, they can pool them and create mortgage-backed securities. The financial institution then sells these MBS to private and government sponsored companies in the secondary market. From there, companies use the MBS as collateral to create new securities. Investors from all over the world can purchase these investments.
Most of these “companies” are US government agencies like Ginnie Mae or government sponsored agencies like Fannie Mae and Freddie Mac. The security is backed by the value of the underlying loans. When homeowners pay their monthly mortgage payment, the bondholder ultimately receives a portion of the interest and principal. Regardless of which organization issued the security, the investment is guaranteed and interest and principal payments are distributed.
In general, the system works when banks impose adequate lending standards and borrowers pay their mortgages on time.
“Most people pay their mortgages,” says Haynie. “Unless you have really bad economic events – but even then, the majority are still paying their mortgages. So from an investment perspective, this is a fairly safe form of credit. ”
Can you control which market your loan is in?
Home buyers don’t have much control over where their mortgages go after the rest day, says van Rijn. But you can Choose a good mortgage lender at the beginning of the process. While you are buying home loans, “you can always ask the lender if they intend to sell your loan,” says van Rijn. “If that’s important to you, you can always go with whoever keeps it local.”
If you choose a lender to sell your mortgage on the secondary market, the lender will contact you and tell you who the loan belongs to. You will also learn more about your credit servicer, a company that collects your payments, tracks your balance, and reports your account information to the credit bureaus.
“The main thing that borrowers need to know is that the manager of your mortgage could change,” says van Rijn. “Who you go to to make payments, ask questions, or file a dispute that is subject to change, so that’s very important to know.”
If you are unsure of where to send your mortgage payments, you can always do so Check your credit reports at AnnualCreditReport.com. You can get a credit report from Experian, TransUnion, and Equifax for free once a year. The name and contact information of the company servicing your loan should appear on these reports.
When it comes to home loans, most borrowers don’t know that “a lot is going on behind the scenes,” says Rueth. Since the secondary market determines much of the behavior in the primary market, it is good to know the basics. While you are getting a home loan with your lender and writing checks to your credit service provider, the money usually goes to a wide variety of investors who own all or part of your mortgage. Understanding the process can help you be a more informed buyer – and that’s always a good thing.