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.