The secondary mortgage market involves buying and selling mortgage loans and servicing rights, often bundled into securities. It injects capital into lenders and can improve chances of mortgage approval. Investors can earn returns, but there is some risk involved.
A secondary mortgage market is the market where mortgage loans and associated servicing rights are bought and sold between the entities that originated those loans and those who 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 such activity often seen as one of the indications of a healthy economy. The level of activity in a secondary mortgage market can have some impact on the ability of new borrowers to obtain 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 portfolio, it is not unusual for a lender to sell a significant percentage of the mortgages originated in the secondary mortgage market. This is often managed by bundling those mortgages into securities that can then be sold to investors in a number of different ways. These mortgage-backed securities may 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 the originating lenders. The available capital can be used to expand the services offered to clients, as well as to partially provide the necessary resources to approve and issue 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 the securities through a secondary mortgage market, those assets may be the source of a continuous stream of returns, assuming the economy remains stable and the value of the underlying assets associated with those mortgages remain at least . 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 that is significantly higher than the original purchase price. Depending on the performance of the securities, the investor may choose to hold the investment for several 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 market movement, it is possible to sell those securities before they begin to fall below the original purchase price, and avoid incur a loss. .
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