When you buy a home, your mortgage is sold to you by a banker or broker on the primary mortgage market. When that first lender sells your mortgage to another firm, your mortgage enters the secondary market. Does it make any difference to you as a consumer?
Primary mortgage market. When you decide to buy a house and apply for a mortgage through a broker or banker, your mortgage will be a new loan, so the lender is said to be “originating” your mortgage. The transaction takes place on the primary market, because it is where new loans are created.
You borrowed from the bank or broker, but they have borrowed the money also, from a “warehouse lender” that loans to mortgage banks. At some point after you take on your mortgage, it gets sold to another company. This is where the secondary market comes into play.
That surprise letter in the mail. Most homeowners with a mortgage will receive a letter telling them that their mortgage has been sold to a new lender or servicer. When that happens, you‘ve just gotten a glimpse of the secondary mortgage market.
The mortgage originator borrowed money to loan it to you. Once you have your loan, the lender will sell your mortgage to another lender or to an investment firm. Your lender then pays back the warehouse lender and borrows money again to originate another loan. This cycle is repeated over and over. The originator makes its money on the fees it charges to borrowers like you.
Didn’t know your loan could be sold? Most consumers don’t read the fine type on their mortgage agreements that allow the loans to be sold.
The vast majority of the time, it makes no difference to you as a consumer. The terms of your loan do not change. The law requires the existing lender to notify you at least 15 days in advance of the transfer date of your loan to the new servicer, and the new company must notify you, too. When you get the letter from the new company, you should study the figures to make sure they have all of your information correct.
Mortgage companies will also sell bundles of many mortgages to be “securitized,” or turned into investment commodities to be bought and sold. Government-backed companies such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) facilitate this process as a means to free up money for future lending. The government-owned company called the Government National Mortgage Association (Ginnie Mae) stands as the guarantor of federal mortgage loans, such as those from FHA and the VA, bundled into investment securities.
All of this transpires on a massive scale. Except for extraordinary events such as the mortgage securities meltdown that happened in 2008, the public goes about life without any idea of the massive market in mortgages operating around them.