What is a Primary & Secondary Mortgage Market
After you close on your mortgage, and take possession of your property, the loan goes through stages, a process commonly known as a mortgage cycle.
The process is divided into two segments, the Primary Mortgage market and the Secondary Mortgage market.
The Primary market consists of the borrower, "you" and the lending institution. The lending institutions in the Primary Mortgage market include the Mortgage Brokers, Mortgage Bankers, Banks, Credit Unions etc. You apply for the loan, if approved, you close on the loan and take possession of the property.
In the Secondary market, multiple loans are packaged together and bought and sold. These are known as Mortgage Backed Securities.
In financial terms, a "Security" is Collateral given or pledged to guarantee the fulfillment of an obligation, especially that a creditor will be repaid (usually with interest) any money or credit extended to a debtor. It is a financial Instrument, an asset that holds monetary value making it viable and worthy of trade.
A Mortgage Backed Security is secured or backed by a collection of mortgages and other Real Estate loans. A number of mortgages are packaged/pooled together with similar characteristics for Investors to buy. For the sake of general understanding, The Mortgage Backed Securities can generally be categorized into three groups.
The first group of the Mortgage backed securities,, purchased and issued by the Federal Government Enterprise Ginnie Mae hold the highest credibility. The Federal government guarantees the Interest and Principal payments on these MBS's. These carry the full faith and the confidence of the United States Federal Government.
The second group of the Mortgage backed securities are purchased and issued by the Government Sponsored Enterprises (GSE's) like Fannie Mae and Freddie Mac. These hold strong credibility, are government sponsored however these are not backed by the United States Federal Government.
The third group consists of private firms that include subsidiaries of Investment banks, financial institutions and builders or a group of builders who may rate less and credit worthy compared to the two categories above.
Since the borrowers make monthly principal and interest payments on their mortgages, MBS investors receive monthly payments rather than quarterly and annual payments.
Related Topics: What are Conforming and Non Conforming Loans Uniform Residential Loan Application What is a Credit Check What is a Credit Score Documents to be signed at closing What are the Duties a loan processor may/may not perform? What is a mortgage underwriter and its Job Description? What is a Mortgage Loan Originator (MLO) and its Job decsiption What is a mortgage lender/funder ? The Loan Estimate (LE) The Closing Disclsoure (CD) Grants & Assistance Programs The Loan Estimate (LE) The Closing Disclsoure (CD) A Mortgage or Security Instrument What are Jumbo Loans? Conventional Loans FHA Loans VA Loans USDA Loans An Adjustable Rate Mortgage A Fixed Rate Mortgage Construction Loans Graduated Payment Loans What is Fannie Mae What is Freddie Mac What is Ginnie Mae What is a Mortgage Backed Security (MBS) What is a Mortgage Servicer?
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