Secondary Mortgage Companies

A mortgage loan is a negotiable instrument. In laymen’s terms, this means that the place from where you get your mortgage may ultimately turn out to be altogether a different place from where you send your monthly payments. Mortgages are often bought and sold by financial institutions. The two largest buyers of mortgages are Fannie Mae and Freddie Mac, both of which are private companies that have public charters to promote homeownership.

There are two types of secondary mortgage markets. In the whole-loan market, individual mortgages are sold, usually in large blocks. The second type is the issuance of a mortgage-backed security. Loans are put into a pool, and securities equal to the value of the loans are issued against the pool. Those securities can then be actively traded as an investment vehicle.

The presence of this peculiarity actually helps to keep mortgage interest rates low by increasing competition. And because mortgage loans can be bought and sold in this way, more loan originators can go into business, because they require less capital to operate, since they hold their notes only for short periods of time. Once a lender sells its mortgages, they are freed up to make more loans. Mortgage companies that do not re-sell their mortgages are called portfolio lenders, and they hold their mortgage notes permanently. Another indirect advantage of the secondary market is that it eliminates regional differences in interest rates.

A portfolio lender typically performs everything involved with servicing the loan; the secondary market, on the other hand, promotes specialization, which in turn allows for efficiencies of scale to be achieved.

The secondary market has also made mortgage loans available to more people. Portfolio lenders typically make mortgage loans only to borrowers with the best credit; but mortgagers who participate in secondary markets are able to offer loans to the sub-prime market.