What’s the “secondary market”?
Veridian Mortgage
Veridian Mortgage CA
Published on December 13, 2021

What’s the “secondary market”?

Are there legislative regulations governing it? 

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In the secondary market, securities are sold by and transferred from one investor to another rather than by the issuer, or principal.  These markets are vital to an efficient and modern capital market – particularly the mortgage markets.  Fundamentally, secondary markets mesh the investor’s preference for liquidity (the desire not to tie up money in case of unforeseen circumstances) with the capital user’s preference to be able to use the capital for an extended period of time.  

A traditional loan allows the borrower to pay back the loan, with interest, over a certain period of time.  During that time, the lender’s investment is inaccessible, even in cases of emergencies.  So it’s understandable that investors may be less likely to put their money into long-term investments, and are more likely to charge a higher interest rate if they do.  That’s why long-term loan programs almost always have the higher note rates. 

With secondary markets, however, investors know that they can recoup some of their investment quickly, if their own circumstances change.  Wholesale mortgage lenders do this by packaging their loans for sale to institutional investors as mortgage-backed securities.  If they don’t conform to the Fannie and Freddie standards, they (Jumbo loans) are sold in the private secondary market to hedge funds and insurers.  So the secondary market plays a very important role to provide this ready solution for investors looking to liquidate securitized loans.  Thus when those investors stop buying for any reason (ie. Subprime scares) it causes a disruption in the liquidity flow which eventually slows/halts borrowing actions and thus buying actions in the real estate arena.  The risk for lenders is now higher, knowing that it is not as easy to sell loans and liquidate like before.  And when risk goes up, price goes up.

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There are no regulations governing this private market although the Fed can indirectly influence the flow of money by changing reserve requirements (see today and Friday) and pegging the Fed Funds rate appropriately

 

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Veridian Mortgage CA
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