Well, considering the ever-changing scenario of the mortgage industry, the secondary mortgage market has faced potential challenges, especially in terms of the financial regulations after the subprime crisis. Indeed, the secondary trading scene was immensely affected and took a back seat for quite some time. But, time has changed with respect to the banking, mortgage and financial sectors. Investors are finding it beneficial to take the risk of splashing out on the tangential trade. To find out the reasons, let’s first begin with an understanding of the entire concept.
What is a secondary mortgage market?
Secondary Market refers to that securities trading business in which existing loans аrе bought аnd sold by investors. Though, terms, such as, resale or the stock market are synonymous with the concept yet there’s much more to it. In the U.S. the noteworthy organizations include the NASDAQ and NYSE New York Stock Exchange, while London’s FTSE, the Euro Next, and Germany’s Deutsche Bourse belong to the European economy.
Ideally investment banks create a pool of mortgages which are then engineered into securities such as collateralized mortgage obligations (CMOs), Government National Mortgage Association (GNMA) or mortgage-backed securities (MBS). Thus, a mortgagee or commercial banks sell these grouped loans to potential investors including insurance companies, pension funds and hedge funds.
The secondary market can be in turn divided into 2 distinctive sub-categories, namely, the dealer and the auction scenario. As the name suggests, the auction mart is primarily concerned with bidding while within the dealer trading center the actual purchase takes place via electronic networks.
The renowned, government-sponsored participants of this emporium are the Federal National Mortgage Association ( Fannie Mae), Government National Mortgage Association (Ginnie Mae) and Federal Home Loan Mortgage Corporation ( Freddie Mac) that buy mortgages and resale those to investors.
How different are the secondary & primary mortgage markets?
Within the primary market, there’s a direct transaction that takes place involving the investment bank IPO underwriter and the buying investor marking the stark difference with the secondary market. Primary Mortgage Market comprises of Commercial banks, insurance companies, institutional lenders, non-institutional lenders or mortgage companies or private lenders, savings and loan associations and more. Whereas, the leaders in the segment include the mortgage originator, the aggregator, the securities dealer and the investor.
Why investors are keen to opt for the secondary market?
Functional restoration in the financial fete by the Federal Reserve through quantitative easing have facilitated the secondary exposition to spring back. Investors are keen to opt for U.S. Treasury bills, bonds and notes promising increased return. Also, offering lowest yield, these are comparatively much safer than other forms of investments.
Thus, in order to generate more cash to provide new loans, banks are more interested in selling the securitized loan bundles in the secondary marketplace.