Wednesday, July 15, 2009

The primary and secondary mortgage markets

The market for home mortgage loans can be divided into the primary mortgage market and the secondary mortgage market. The primary mortgage market is the loan origination market, in which borrowers and lenders come together. Numerous institutions supply money to borrowers in the primary mortgage market, including savings and loan associations, commercial banks, credit union, and mortgage banking companies. Increasingly, this lending has been done through a mortgage broker.
Mortgage originators can either hold the loans in their portfolios or sell them in the secondary mortgage market. The largest purchasers of residential mortgages in the secondary mortgage market are Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) were created by acts of congress to promote an active secondary market for home mortgage by purchasing mortgage from local originators. The existence of a well-functioning secondary market makes the primary mortgage market more efficient. If mortgage originators are able to sell their mortgage investments quickly, they obtain funds to originate more loans in the primary market. In today is world, the secondary market institutions, especially the GSEs, play a leading role in the home mortgage market. The menu of loans that the GSEs are willing to buy heavily influences the menu of loans that lenders are willing to originate.

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