· Maybe you have heard the term-maybe you haven’t. Either way if you are at all interested in buying, selling, or owning a home the secondary market plays a HUGE roll in the big picture!
· The secondary mortgage market marketplace can be a confusing place. It is comprised of banks, investors and financial institutions that trades mortgages, servicing rights and mortgage-backed securities, and it has a massive impact on the mortgage a borrower qualifies for and the rate they pay.
· After a lender extends - loans money to the homebuyer, it could keep the loan on its books for the loan’s term, but the lender often doesn’t hold the loan, instead They sell the loan into the secondary mortgage market. This enables the lender to use their limited capital efficiently,
· Selling the loan generats fees for underwriting mortgages and then they use this capital again to fund a new loan.
· Many loans are sold to the government-sponsored enterprises like Fannie Mae and Freddie Mac or even mortgage originators like themselves.
· Some hold them on their own books and collect the interest from borrowers.
· They also allow the Servicing rights (this is the right to collect the monthly principal and interest payment) To be sold or managed by another company. This can be a lucrative stream of fees as well. The servicer receives a fee for processing the monthly payment, tracking the loan balance, generating tax forms, and managing escrow accounts, among other functions.
· To be sold to the agencies, the loan must be “conforming”: the loan must meet certain standards set by the agencies. These factors include a maximum loan amount and debt to income ratio, and a minimum down payment percentage and credit score. The demand for conforming loans helps push down the mortgage rates for borrowers who can meet the standards.
· Even amongst conforming loans, mortgages there are varying degrees of safety (the safer the bond, the lower its yield). Investors looking for a higher interest payment can buy the somewhat riskier mortgage-backed securities (MBS)
· Investors looking for other traits in investments -based on risk or timing of cash flows- can find other MBS (A mortgage-backed security) bonds to meet their specific needs.
· Many Investors look for exposure to specific kinds of securities that better meet their needs and risk tolerance, and that fuels the demand.
· To put it succinctly, the secondary market exists to create more efficiency and meet the needs of the Primary Market
· Economists are anticipating as the COVID 19 vaccine continues to be made more publicly available that this impact the housing market
· The U.S. has lost over twenty-two million jobs since the start of the pandemic across various sectors impacted by restrictions and shutdowns, though housing has remained a bright spot. The vaccine beckons the possibility of a boom in employment, consumer spending, the economy, and likely a rise in prices.
· Rates move up when the economy is growing, or expected to grow, and vice versa. With the expectation of “normal” returning to the economy, upward pressure is being put on interest rates.
· Historically low rates have had an impact on the housing markets: despite the pandemic and tens of millions of Americans being out of work, home sales rose massively.
· Those low rates have enabled more buying power for home seekers, which will slow if rates rise. That, along with increasing forbearances, delinquencies foreclosures are some upcoming headwinds for the housing market.
· What is agreed amongst economists is that the road to full recovery will take time for the U.S. The Covid-19 pandemic is expected to cost the economy multiple times the cost of the Great Recession,
· Most U.S. economic data improved through late summer, but the rate of improvement has slowed since then, revealing an increasing divide between economic winners and losers
· The U.S. economy is resilient and dynamic, which means two things going forward. First, we should see a recovery in financial markets before recoveries by GDP and the labor market.
· No one knows precisely how these various forces will shake out, but the reallocation shifts tend to boost economy-wide productivity over the long-run.
· Fortunately, there are a lot of tailwinds in the Real Estate sector. There is currently a buoyant U.S. housing market, benefiting from both ultra-low mortgage rates and a sudden surge in Americans looking to live in more rural and suburban areas. Additionally, fiscal policy (expanded unemployment benefits, forbearance provisions, etc.) has helped to mitigate many of the negative effects we would normally expect to see in a U.S. recession. Hopefully, that means that over the next few months, the economy will continue to chug along and so will the housing market.