Mortgage loans are a means to obtain money to purchase a house or real estate. Many people borrow the majority of the funds needed to buy their home, and then finance the remainder through a lending institution. By doing this, they are able to spread the payments over an allotted period of time, usually 15 to 30 years. What most people do not know is that many of their loans are then sold to another bank in the secondary market.
When a person initiates the lending procedure by finding a lending institution and agreeing to the terms of the contract, they are dealing in the primary market. It is here that the principal amount, interest rates, and length of the loan are decided. The details are subject to the stipulations of the bank and the agreement of the borrower.
The repetition of this process for individuals and businesses begins to slowly deplete the resources of the bank. Loans can be made for home purchases, or other personal or commercial reasons. As more people are lent money, the reserves of the institution are slowly no longer available for others to use.
Institutions which function in the secondary market purchase these loans from the primary lenders. The reason that the first lender is willing to sell is because they would like to have more funds on hand to lend to other people. The interest charged on these loans is a means to produce a large portion of their income.
Once purchased, the institution will often bundle together similar home loan purchases so as to create a security to be sold on the stock market. Investors can purchase shares of the securities, which the company hopes will help to offset the risk of defaulting on their payments. These types of products are usually called mortgage-backed securities or collateralized debt obligations, plus a few other names.
A home buyer need not worry about the loss of their mortgage loans or the bank's inability to cover the payment. The secondary market bears no effect on this. What it does affect is the investor seeking to purchase shares of the securities, especially if a number of borrowers default on their payments. This is a complicated process to understand for many.
When a person initiates the lending procedure by finding a lending institution and agreeing to the terms of the contract, they are dealing in the primary market. It is here that the principal amount, interest rates, and length of the loan are decided. The details are subject to the stipulations of the bank and the agreement of the borrower.
The repetition of this process for individuals and businesses begins to slowly deplete the resources of the bank. Loans can be made for home purchases, or other personal or commercial reasons. As more people are lent money, the reserves of the institution are slowly no longer available for others to use.
Institutions which function in the secondary market purchase these loans from the primary lenders. The reason that the first lender is willing to sell is because they would like to have more funds on hand to lend to other people. The interest charged on these loans is a means to produce a large portion of their income.
Once purchased, the institution will often bundle together similar home loan purchases so as to create a security to be sold on the stock market. Investors can purchase shares of the securities, which the company hopes will help to offset the risk of defaulting on their payments. These types of products are usually called mortgage-backed securities or collateralized debt obligations, plus a few other names.
A home buyer need not worry about the loss of their mortgage loans or the bank's inability to cover the payment. The secondary market bears no effect on this. What it does affect is the investor seeking to purchase shares of the securities, especially if a number of borrowers default on their payments. This is a complicated process to understand for many.
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