What Is The Secondary Mortgage Market And How Does It Work?

Feb 17, 2023

5-minute read

Share:

A couple having a conversation over breakfast, potentially discussing financial matters or plans.

The secondary mortgage market is an expansive real estate arena in which financial institutions and investors buy and sell mortgages. Although the average mortgage holder won’t realize what’s happening beneath the surface, their mortgage will likely end up on the secondary mortgage market at some point.

Here’s what you need to know about the secondary mortgage market.

The Secondary Mortgage Market Explained

The secondary mortgage market is how lenders and investors buy and sell mortgages and the servicing rights that go along with them. When mortgages are sold within the secondary mortgage market, many are packaged into mortgage-backed securities (MBSs). MBSs are then sold to investors, including insurance companies and hedge funds.

Why Do Lenders Sell Mortgages?

When a lender offers you a mortgage, they carry the debt on their balance sheet until you’ve paid them back in full. Since most mortgages take about 10 – 30 years to pay off, lenders may need to carry the debt for a long time.

By selling mortgages to investors, lenders can take the debt off their books. This can free up money that lenders can then use to offer more mortgages to home buyers.

Why Do Investors Buy Mortgages?

MBSs are valued by investors because they provide a stable rate of return based on the mortgage terms that you’ve negotiated with your lender. They know that most homeowners will want to pay their mortgages and if a homeowner defaults, the home acts as collateral to protect the investment.

This makes it less volatile than stocks while offering a higher potential rate of return compared to treasury notes and other government bonds.

Does The Secondary Mortgage Market Put Your Mortgage At Risk?

The secondary mortgage market actually protects home buyers and helps keep the housing market stable. It does this by setting lending limits, and minimum credit score and debt-to-income (DTI) ratio standards that lenders must observe if they want to be able to sell their mortgages on the secondary market.

This provides lenders with an incentive to only offer mortgages to qualified home buyers.

All in all, the secondary mortgage market creates a type of liquid investment that aids in making loans available to the borrower. With that, the secondary mortgage market is critical to creating regular access to borrowing power.

See What You Qualify For