Banks, mortgage brokers, mortgage bankers and credit unions are all major lenders and are part of the main mortgage market. Homeowners can deal directly with major lenders when seeking a home loan by contacting their local bank. The mortgage originator is the first company to participate in the secondary mortgage market. Mortgage originators consist of retail banks, mortgage bankers and mortgage brokers.
While banks use their traditional sources of funding to close loans, mortgage bankers often use what is known as a warehouse line of credit to finance loans. Most banks and almost all mortgage bankers quickly sell newly created mortgages in the secondary market. The main participants in the secondary mortgage market are mortgage originators, buyers, mortgage investors and homeowners. Mortgage originators, or lenders, create the mortgages and can then sell the service rights in the secondary mortgage market.
Borrowers who need the help of a lender to achieve their goal of homeownership will find what they are looking for in the primary mortgage market. The secondary mortgage market is where lenders and investors buy and sell mortgages and their service rights. Its purpose is to provide lenders with a consistent source of money to lend, while alleviating the risk of owning the mortgage. Originators who accumulate mortgages before selling them usually cover their mortgage plans against changes in interest rates.
Without the secondary mortgage market, lenders would be limited in seeking capital to lend to homebuyers, which would likely lead to higher interest rates. When trying to understand the mortgage lending process, the primary mortgage market is a fundamental piece of the puzzle. The secondary mortgage market is huge, liquid and complex, and several institutions are willing to consume a portion of the mortgage pie. Hedge funds are often large investors in mortgage products with low credit ratings and structured mortgage products that have higher interest rate risk.
Other major financial institutions, such as Lehman Brothers and Bear Stearns, also had large amounts linked to mortgages. Aggregators buy newly created mortgages from smaller originators and, together with their own originations, form pools of mortgages that securitize in securities backed by private label mortgages (working with Wall Street firms) or form securities backed by agency mortgages (working through GSE). As a borrower, you can look for the best available rate to get a home loan from a major lender. With that, you'll enter the primary mortgage market as a borrower looking for the right lender for your situation.
Like originators, aggregators must cover pending mortgages from the moment they commit to buying a mortgage, through the securitization process, until the MBS is sold to a securities broker. However, depending on their size and sophistication, a mortgage originator can add mortgages for a certain period of time before selling the entire package; they can also sell individual loans as they originated.