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What is a Secondary Mortgage Market?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 September 2016
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A secondary mortgage market is the marketplace where mortgage loans and the associated service rights are purchased and sold between the entities that originated those loans and those who would utilize those debt options to create mortgage-backed securities. The activity in this type of marketplace tends to be robust in many nations around the world, with that activity often viewed as one of the indications of a healthy economy. The activity level of a secondary mortgage market can have some degree of impact on the ability of new borrowers to secure mortgages, as well as the ability of current mortgage holders to refinance those existing mortgages.

As part of the overall function of what is known as the mortgage pipeline, it is not unusual for a lender to sell a significant percentage of the originated mortgages in the secondary mortgage market. This is often managed by bundling those mortgages into securities that can then be sold to investors in several different ways. These mortgage-backed securities may be sold as hedge funds, pension funds, or as securities associated with an insurance company.

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One of the immediate benefits generated by the secondary mortgage market is the injection of capital to those originating lenders. The capital on hand can be used to expand services offered to customers, as well as partially provide the resources necessary to approve and issue new mortgages. From this perspective, the existence of a secondary mortgage market is good for consumers, since it aids in improving the chances of a qualified applicant to be approved for a mortgage, and become a homeowner.

For those who purchase the securities through a secondary mortgage market, those assets can be the source of an ongoing stream of return, assuming that the economy remains stable and the value of the underlying assets associated with those mortgages is at least maintained. In a strong market, an investor may choose to purchase mortgage-backed securities and hold them for a period of time, then resell them at a rate that is significantly higher than the original purchase price. Depending on the performance of the securities, the investor may choose to hold onto the investment for a number of years, or for no more than a few months. As with any type of investment activity, there is some risk of loss, but if the investor accurately predicts the movement of the marketplace, it is possible to sell those securities before they begin to drop below that original purchase price, and avoid incurring a loss.

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Soulfox
Post 2

@Markerrag -- it's easy enough to understand how all that happened. The subprime mortgage market formed for the express purpose of making high risk loans to people with bad credit histories.

The secondary mortgage market was somewhat unregulated back then and it was a popular place for people to invest money. That led to a situation where some banks really didn't care if someone could afford a mortgage or not because they knew they could sell them in the secondary mortgage market. When you've got an unregulated marketplace, willing buyers and some questionable lending practices, that's a good recipe for disaster.

It's worth mentioning that most banks didn't take on such risky loans. Enough of them did, however, to cause some real problems.

Markerrag
Post 1

We've all seen how that system can be abused, can't we? The so-called credit crisis in the mid-2000s in the United States was caused by a bunch of people not being able to pay their mortgages, causing defaults and real trouble in the secondary mortgage market. There was a real concern that the entire system would collapse and it would have if the government hadn't come in and bailed out banks by buying up a lot of those bad loans.

Here's the question -- how on earth did that situation happen?

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