One important question that comes to mind is why’d the existence of a secondary Mortgage Market? The answer then will be so long as there is a Housing need, the desire to own one’s Home especially when you have limited funds to out rightly purchase one, and the quest to increase home ownership, and the desire to invest in the housing sector , then the need for a Mortgages market cannot be overemphasized.
A secondary Mortgage Market is therefore important as loans are being financed, sold, managed and the security of the loan guaranteed by players in the industry to ensure that Housing needs are met. The secondary Mortgage Market therefore, connects the lender, homebuyers and investors.
What Is the Secondary Mortgage Market?
The secondary mortgage market is a marketplace where home loans and rights such as servicing rights of the loan, security of the loan are bought and sold between lenders or mortgage originators and investors such as pension funds, insurance companies etc.
A secondary Mortgage market is Simply defined as a market where lenders sell or market Mortgage loans to prospective buyers or investors. A market where securities as collateral for the value of a Mortgage loan s are sold to investors.
For instance, a Home loan that is given to a prospective Home owner is financed, guaranteed and serviced by financial institution usually a Bank. , they in turn also need to restock the funds so as not to risk running short of available funds in order to continue in the business of offering funding services to other clients, the bank known as the mortgage originator then decides to sell the loan as public offers to investors ( combination of those who buy and secure the value of the loan as well as those who resell the securitize loan and those who buy the securitize loan to make income) in a market called the Secondary Mortgage Market to enable them raise more money in order to take care of additional clients . The bank may choose to accumulate loans for certain periods before selling.
The United States and Malaysia are models of successful Secondary Mortgage Market (SMM) driven by the sole aim of increasing the level of home ownership, securing mortgages and create competition in the Mortgage market by Government of the both countries.
Importance of secondary Mortgage Market
The Secondary Mortgage Market has enormous benefits as follows:
- Helps to make credit facility available to borrowers.
- Brings about competition by encouraging participation of other loan originators known
as Mortgage Banks
- SMMs provide a platform where mortgage originators are able to sell the proceeds from the loans before maturity, in return for capital
- it creates and improves liquidity in the Mortgage Markets and consequently access to housing finance as a result of increase participation by loan originators
- creates employment opportunities across the housing value chain
- fosters economic growth as it allows participation in the Capital Market
- The secondary mortgage market allows banks to repackage and sell mortgages as securities to investors such as large pension funds, insurance companies, hedge funds, and the Government
who are the major participants in the secondary mortgage market?
In order to obtain a more in-depth understanding of how secondary marketing works, it’s important to take a look at the major participants in this cycle, as well as the role that each one plays in moving capital: the mortgage originators, the aggregator, the security dealers and investors are all participants in the Secondary Mortgage Market.
- BANKS: they are the mortgage originators who are the first sales point in the secondary Mortgage Market: Before the secondary mortgage market was established, banks had to wait a long time before they were repaid for a mortgage, typically 15 to 20 years. This meant that fewer financial institutions had enough capital to write mortgage loans, and as a result, potential homebuyers had a hard time finding mortgage lenders. Now, selling mortgage loans allows banks to recoup the cost of lending and to use the proceeds to fund new loans.
- B. THE AGGREGATORS: Are also Mortgage originators with ties to Government-sponsored enterprises (GSEs) such as Federal Home Loan Mortgage in the US, Federal Housing Authority and Federal Mortgage Banks of Nigeria etc.
Aggregators buy mortgages from financial institutions and form a pool of mortgages alongside want they already have and turns them into a security categorize as Mortgage-backed securities (MBS) which are usually mortgage debt investments and then sold to investors.
Aggregators are more or less of a service provider who takes the burden of creating Mortgage Backed securities off issuers.
- SECURITIES DEALERS: These are dealers or Brokers in Mortgage Backed Security who buy and sell the securitize loans in the secondary Mortgage Market to investors.
- D. INVESTORS: The last groups of participants in this cycle are the investors such as pension funds, insurance companies, banks, GSEs , foreign Governments who invest in mortgage products such as MBS(Mortgage backed securities), CMOs (,Collateralized Mortgage Obligation), ABS, (Asset backed Securities: this is a pool of non-mortgage asset such as student loan) and CDOs(Collateralized Debt Obligation : an investment products that contains assets and loan products). These product offer investors a wide range of potential yields based on changing credit quality and interest rate risk
What Are the two important functions the secondary mortgage market serves for the real estate industry?
- The secondary mortgage market allows banks to repackage and sell mortgages as securities to institutional investors thereby creating more liquidity and access to finance on both the demand and supply sides of the housing sector.
- It provides competition amongst real estate developers’ thereby availing homebuyers’ multiple options and fairer and more flexible mortgage terms
How Does The Secondary Mortgage Market Work?
To start, even though lenders issue mortgages to homeowners, they rarely keep the debt in-
house. Instead, the loans are sold off shortly after closing to loan aggregators like Federal
Mortgage Bank of Nigeria (FMBN), Federal Home Loan Mortgage in the US or a private institution like Cosgrove Estates, Net construct etc. The lenders are paid in exchange for those loans and they use those funds to provide mortgages to additional buyers.
Once the loan aggregators buy the loans, they bundle them with other mortgages that have a
similar risk level. Those bundles are known as mortgage-backed securities (MBS). The mortgage-
backed securities are then sold on the market to investors like governments, pension funds, insurance companies and real estate contractors. While the main focus here will be the secondary loan market, it’s worth noting that other types of debt are also sold in secondary Mortgage markets as well. Auto loans, Medical loans debts are all packaged and sold in this way. In particular, so is Nigerian Treasury bills, bonds, and notes, which have an effect on all interest rates.
What Is The Difference Between Primary And Secondary Mortgage Market?
At the primary market the process of loan negotiation starts here between the borrowers who is looking for money and a participant such as Mortgage Banks, mortgage brokers at the primary market. The aim is to create mortgage loans for the borrower.
Let’s take for instance, an individual who intends to get a mortgage loan to purchase a house will approach the primary mortgage market and chose one of the mortgage Bank to work with. He or she will be profile and the Process of loan negotiation starts if he or she is qualified, and then she eventually gets an approval for the loan that is adequate to buy the house from the mortgage bank.
Primary lenders typically keep the loans they originate as part of their portfolio and service them for the life of the loan. However, the bank that made the mortgage loan can sell the loan in the secondary mortgage market.
The secondary Market which is a market where investors can buy and sell previously-issued mortgage loans. The loan that the individual borrow from the Primary mortgage market are usually obtained from financial institutions or Mortgage Banks. The borrower’s bank gets this fund and in turn loans to the borrower to make more money. After a while, the Bank can decide to transfer ownership of the loan by selling it to another investor to enable her pay back to where she borrowed from. This process is done at the secondary mortgage market.
What Is A Secondary Mortgage Loan?
A second mortgage loan is a loan you take out using your house as collateral to secure the loan by your house. This means that the initial loan you are on is stilling running but you are housing your house as collateral to enable you access another fund probably for the purpose of financing a project.
What Is The Difference Between A Home Equity And A Second Mortgage?
The main difference between a home equity loan and a traditional mortgage is that you take out
a home equity loan after you have bought and accumulated equity in the property; but you get a mortgage to be able to purchase (finance) the property in the first place—then you start accumulating equity in it.
So, to better explain a Home Equity and Second Mortgage we simply state that a second mortgage is another loan taken against a property that is already mortgaged. A second loan or mortgage, against your house will either be a home equity loan. It is determined by the value of your property or house valued by your lender and your mortgage balance. It is also a lump-sum loan with a fixed term and rate
The development of a successful secondary Mortgage Market backed by Government support will go a long way in creating enough funds for financing Mortgages and will also enhance economic growth.