First and Secondary Mortgage Loan Markets

Home loan financing is unlike other credit financing. The ever-evolving industry is inundated with change. As a result, the act of remaining informed poses a bit of a challenge for the consumer in quest of a low interest mortgage. Subsequently, the pursuit of buying a new home or obtaining refinancing necessitates understanding how the mortgage loan sector works and how lenders profit from the loans they write.

Institutional Lenders traverse a wide spectrum of private versus institutional lenders. In example, institutional lending institutions or lenders include the following:

• Commercial banks

• Credit unions

• Savings and loans

• Mortgage banking companies

• Pension funds

• Insurance companies

In general, lending companies base the loan application approval process on the credit and income of the borrower. Standardized lending guidelines are followed. On the other hand, private lenders can be either a small company or an individual who does not have insured depositors. Normally, private lenders are not regulated by the federal government.

Primary and secondary mortgage markets should not be confused with a first and second mortgage. In the primary mortgage market, the lender interacts and negotiates directly with the public. The mortgage loan is ‘originated.’ In other words, a primary lender will extend home financing directly to the consumer. Primary is often deemed as the ‘retail’ side of the business. Moreover, the lender will incur a profit from loan processing fees opposed to the interest paid on the loan. In many cases, the primary mortgage lenders will offer home loans to consumers and then vend the mortgage notes to investors on the secondary mortgage market to replenish their cash reserves.

In the second market of the mortgage industry, the largest buyers include the following:

• Federal National Mortgage Association (FNMA or “Fannie Mae”),

• Government National Mortgage Association (GNMA or “Ginnie Mae”)

• The Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”)

• Private financial institutions (private investors, life insurance companies, banks, and thrift organization purchase mortgage notes).