The secondary mortgage market is the market in which purchases and sales take place between the originators of mortgage loans and related servicing rights and the entities that will use these debt options to generate mortgage-backed securities. In many countries around the world, acting in such markets tends to be brisk, which is often seen as one of the hallmarks of a healthy economy. The level of activity in the secondary mortgage market may have some impact on the ability of new borrowers to obtain mortgages and the ability of current mortgage holders to refinance those existing mortgages.
It is not uncommon for lenders to sell a significant percentage of the original collateral on the secondary mortgage market as part of the overall function of the collateral channel. These mortgages are typically managed by bundling them into securities, which are then sold to investors in several different ways. These mortgage-backed securities can be sold as hedge funds, pensions, or securities linked to insurance companies.
One of the immediate benefits of the subprime mortgage market is the injection of capital into originators. Existing funds can be used to expand the services offered to clients, as well as partially provide the resources needed to approve and issue new collateral. From this perspective, the existence of a secondary mortgage market is beneficial to consumers because it helps improve the chances of a qualified applicant being approved for a mortgage and becoming a homeowner.
For those buying securities through the secondary mortgage market, these assets may be a source of ongoing returns, assuming the economy remains stable and the value of the underlying assets associated with those mortgages is at least maintained. In a strong market, investors can choose to buy mortgage-backed securities, hold them for some time, and then resell them well above the original purchase price. Depending on the performance of the security, investors can choose to keep the investment for a few years or no more than a few months. As with any type of investment activity, there is a risk of loss, but if investors accurately predict the market’s direction, it is possible to avoid losses by selling these securities before they begin to fall below their original purchase price.