The secondary mortgage market involves buying and selling mortgage loans and associated fees to create mortgage-backed securities. This market injects capital into originator lenders, improves chances of mortgage approval for consumers, and provides a source of ongoing returns for investors.
A secondary mortgage market is the market in which mortgage loans and associated servicing fees are bought and sold between the entities that originated those loans and those that would use those debt options to create mortgage-backed securities. Activity in this type of market tends to be robust in many nations around the world, with that activity often seen as one of the indications of a healthy economy. The level of activity in a secondary mortgage market can have an impact on the ability of new borrowers to secure mortgages, as well as the ability of current mortgage holders to refinance 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 its originated mortgages into the secondary mortgage market. This is often managed by bundling those mortgages into securities which can then be sold to investors in a variety of ways. These mortgage-backed securities can be sold as hedge funds, pension funds, or as securities associated with an insurance company.
One of the immediate benefits generated by the secondary mortgage market is the injection of capital to originator lenders. The available capital can be used to expand the services offered to customers, as well as partially supplying the resources necessary for the approval and issue of new mortgages. From this perspective, the existence of a secondary mortgage market is good for consumers, as it helps improve a qualified applicant’s chances of being approved for a mortgage and becoming a homeowner.
For those who purchase securities through a secondary mortgage market, such assets can be a source of an ongoing stream of returns, assuming 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 buy mortgage-backed securities and hold them for a period of time, then resell them at a rate significantly higher than the original purchase price. Depending on the performance of the securities, the investor may choose to hold the investment for a number of years or for as little as a few months. As with any type of investment business, there is some risk of loss, but if the investor accurately predicts market movement, those securities can be sold before they begin to fall below their original purchase price and avoid incurring in a loss .
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