Primary Mortgage Market
A primary mortgage market is the market where mortgage loans are originated. Borrowers and lenders meet in the primary mortgage market to negotiate the terms of loans and hopefully enter into lending agreements. Once a loan has been established, it could be sold to another financial institution, by this entering the secondary mortgage market. Many companies in the financial industry are involved in both the primary and secondary mortgage markets.
On the primary mortgage market, lenders such as banks and credit unions can connect with people who want to borrow money. They help borrowers with information about the available options. Mortgage brokers work with borrowers to package them, by collecting information about their income, assets, etc. Then they present potential lenders with a complete package of information which can be used to establish a loan.
Mortgage brokers need licenses from the government and must follow certain ethical standards. Brokers tend to be independent and pursue slightly different certifications because the nature of their work is different. The goal of all parties is to establish a borrower with a loan she or he can afford.
When the economy is good, business in the primary mortgage market is usually brisk and it is generally easy to get loans. During periods of down credit and other financial issues, it can be difficult to obtain a mortgage. This has a ripple effect, as the secondary mortgage market suffers when fewer loans are being originated, and in turn financial instruments based on that market can fall in value.
Secondary Mortgage Market
The secondary mortgage market is the market that deals with sales of securities or bonds collateralized by the value of mortgage loans. A mortgage lender, banks, or a specialized firm will group together many loans (from the primary mortgage market) and sell grouped loans known as collateralized mortgage obligations (CMOs) or mortgage backed securities (MBS) to investors such as pension funds, insurance companies and hedge funds. Mortgage-backed securities were often combined into collateralized debt obligations (CDOs).
The secondary mortgage market was intended to provided a new source of capital for the market when the traditional source in the market was unable to. It also was hoped to be more efficient than the old localized market for funds which might have a shortage or surplus depending on the location. In theory, the risk of default on individual loans was greatly reduced by this aggregation process, such that even high-risk individual loans could be treated as part of an AAA-risk investment, the safest kind.