Secondary Mortgage Market Major Players

Introduction

• Purpose: Understanding behind-the-scenes of mortgages and secondary mortgage market.
• Key Concept: Mortgages are seen as streams of future cash flows by investors.

The Secondary Mortgage Market

• A large and liquid market where mortgage loans are bought, sold, and securitized.
• Mortgages end up as part of mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized mortgage obligations (CMO), or collateralized debt obligations (CDO).
• Various institutions take part in the distribution of fees and cash flows.

Major Players in the Market

1. Mortgage Originator

   • Involves retail banks, mortgage bankers, and mortgage brokers.
   • Banks and mortgage bankers use their funds or a warehouse line of credit to fund loans.
   • Mortgage brokers connect borrowers with banks or mortgage bankers.
   • Originators sell mortgages quickly to the secondary market.
   • Aggregates mortgages before selling or sells as they are originated.

2. Aggregator

   • Large originators linked to Wall Street firms and government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.
   • Purchase newly originated mortgages and form pools for securitization.
   • Hedge mortgages against interest rate changes and fallout risk.

3. Securities Dealers

   • Sell MBS to investors post-securitization.
   • Use trading desks to structure CMOs, ABSs, and CDOs.
   • Aim to make profits through arbitrage and creative structuring.

4. Investors

   • End users include foreign governments, pension funds, insurance companies, banks, GSEs, and hedge funds.
   • Seek MBS, CMOs, ABSs, and CDOs for yield based on credit quality and interest rate risks.
   • GSEs hold the largest portfolios, regulated by the Office of Federal Housing Enterprise Oversight.

Reasons for Banks and Investors

• Banks Sell Mortgages: For liquidity and profitability, freeing up capital for new loans.
• Investors Buy Mortgages: For income from interest; MBS provide steady income and higher yields.

Key Products

• Mortgage-backed Security (MBS): Investment providing fixed-income interest payments, consisting of pooled mortgage loans.

Working of the Secondary Mortgage Market

• Mortgage loans sold by originators to aggregators.
• Aggregators package loans into MBS.
• Securities dealers sell these to investors.

Collateralized Debt Obligation (CDO)

• Fixed-income security containing a variety of loans or debts.

Conclusion

• Mortgages often become investments quickly post origination.
• Secondary mortgage market is complex and involves multiple institutions.

Important Note

• Selling a mortgage converts one asset to another on a bank's balance sheet, enhancing liquidity.

This guide provides a comprehensive overview of the secondary mortgage market and its major players, highlighting the roles of originators, aggregators, securities dealers, and investors.