Process
The flow of credit that finances most U.S. mortgages originates from a secondary market, such as a large investment bank or a Fannie Mae or Freddie Mac institution. Small, community banks use funds from within the community to finance banks but sometimes sell loans to increase profit margins. The retail market for mortgages exists due primarily to two factors: the release of liability and the increase in revenue.
Selling Mortgages
A retail lender (Wells Fargo, HSBC) or a broker originates a mortgage loan to a borrower. The lender gains any upfront fees charged on the loan--title fees, origination charges--and begins to service the loan by collecting payments and interest on the note. The lender contacts a secondary market investor (Goldman Sachs, Lehman Brothers) to offer a sale on its originated loans. Generally, these mortgages are sold in bundles, not individually. The secondary market investor agrees to a price and agrees to take on the liability of the group of mortgages.
Buying Mortgages
An investor chooses to buy bundles of mortgage debt in an attempt to leverage the debt as an asset to make a greater profit. The role of the investor is to analyze the risk in shouldering a mass lump of debt versus the benefit of bundling the debt together into a security, which can be traded on the open market for other investors. Secondary market investors make purchasing decisions with particular lenders based on risk performance and underwriting guidelines--a process by which these investors can mitigate risk.
Tags: secondary market, market investor, secondary market investor