What Is Secondary Market?

In real estate, a secondary market is a place where investors and lenders buy and sell home loans and servicing rights. Generally, most home loans in the US are eventually sold to this type of market.

When people obtain loans to purchase their own homes, the loans will be underwritten, funded, and serviced by a lender or a bank. Now, as lenders or banks could eventually run out of money to loan out, as they are using their own funds in making loans, they would sell loans to this type of market to replenish their funds. Most of the time, loans are sold to major aggregators, such as Fannie Mae and Freddie Mac, which also trade mortgages on this market. In a way, these aggregators turn the loans they have bought into mortgage-backed securities and then sell them to other investors, including hedge and pension funds, insurers, and some government departments.

As a resale marketplace of loans, a secondary market offers greater availability of financial options for additional mortgage lending.

Moreover, transactions made on this type of market are only labelled as secondary because they are a step away from being removed from the transaction that initially generated the securities involved.

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