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What is a Secondary Market Mortgage?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 August 2016
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A secondary market mortgage is a mortgage that is sold by the originators of the loan into what is known as the secondary mortgage market. This approach allows the originators to benefit from the loan quickly and easily, by allowing investors to buy into the mortgage early on and incrementally receive returns on that investment as the debtor pays off the balance due. In some cases, originators combine a number of mortgages into a single block or set, then market those sets to investors with the aid of mortgage aggregators.

The homeowner who holds a secondary market mortgage normally notices nothing different about his or her mortgage arrangement. Payments are made according to the terms settled upon at the time the mortgage was extended. In some cases, the mortgage itself may be sold as an asset to a new financial institution. When this occurs, the new owner will normally supply the homeowner with the necessary information regarding where to remit payments and how to contact the new mortgage lender in the event there are questions or concerns about the processing of payments or other matters pertaining the mortgage.

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In the United States, government real estate giants Fannie Mae and Freddie Mac service many secondary market mortgage loans. The benefit of this arrangement is that lenders can work through these agencies to use the mortgages as a means of maintaining a steady flow of resources that can be used to write additional mortgages. By maintaining liquidity within the mortgage industry, the chances of attracting consumers with attractive rates, while still keeping the degree of risk involved within reason, is enhanced. While not everyone is in favor of working through agencies like Freddie Mac and Fannie Mae as the means of maintaining that liquidity, this type of mortgaging arrangement is very popular in the United States and has remained so through both periods of prosperity and recession in the national economy.

This secondary market mortgage strategy does provide opportunities for investors who are willing to take on different types of mortgage-backed securities, including various kinds collateralized mortgage obligations. In fact, this type of investment activity often represents a means of earning a consistent and equitable return with relatively little risk in comparison to some other investments offering similar returns. Assuming that the default rate on a secondary market mortgage investment remains low, investors stand to enjoy a steady flow of return from the opportunity over a number of years. This steady return over time makes this type of investment well worth considering.

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