The primary mortgage market is where borrowers can obtain a mortgage loan from a primary lender. The traditional primary mortgage market consisted of savings and loan associations, savings banks, commercial banks, thrift and loans, credit unions, pension funds and insurance companies, as well as mortgage bankers that originated mortgage loans by lending funds obtained from their own capital or from independent credit lines that appear as debts in their financial statements. The foregoing depository institutions and lenders funded and made loans directly to consumers/borrowers in residential mortgage loan transactions. These participants in the primary mortgage market replenished their capital/funds by selling loans in the secondary mortgage market.
Historically, residential mortgage loans sold into the secondary mortgage market were either insured by the Federal Housing Administration (FHA) or guaranteed or indemnified by the Veteran's Administration (VA). Mortgage bankers that originated mortgage loans performed as loan correspondents (agents and authorized representatives) of depository institutions. Those mortgage bankers with sizeable assets at levels acceptable and with the mortgage experience required by government agencies qualified as "approved lenders/mortgagees" by FHA and VA. Since the late 1960's, conventional loans originated by these depository institutions and licensed lenders (subsequently including mortgage bankers) were sold into the secondary mortgage market. Because of federal legislation, the secondary mortgage market for conventional loans included the previously mentioned quasi-government enterprises, Fannie Mae and Freddie Mac.
Federal Housing Administration (FHA)
This agency insures loans made by approved lenders/mortgagees.
Veterans Administration (VA)
This agency currently indemnifies loans made to veterans for housing, farms or businesses by approved lenders/mortgagees.
Mortgage Bankers
Mortgage bankers are privately-owned companies that are often subsidiaries of or affiliated with banks, savings and loans or savings banks, or of their respective holding companies. Mortgage bankers who generally perform as loan correspondents (authorized agents and representatives of depository institutions and of other lenders) originated from their own capital or independent credit lines conventional loans and FHA or VA insured or indemnified residential mortgage loans. Mortgage bankers have also participated in the more recent structuring of alternative mortgages and non-traditional loan products and ultimately became a significant source of origination of such loans.
Mortgage bankers may retain servicing of the residential mortgage loans they have sold in the secondary market, may release servicing rights to purchasers of loans (a "whole loan" sale), or they may sell the servicing separately to a licensed and authorized servicer or to a service that is lawfully exempt from licensing.
Here's a breakdown of how the primary mortgage market works:
Borrowers apply for a mortgage: When you're ready to buy a home, you'll apply for a mortgage loan from a primary lender.
Lender evaluates the borrower: The lender will review your credit history, income, and other financial information to determine if you qualify for a loan and how much you can borrow.
Loan is originated: If you qualify, the lender will originate the mortgage loan, which means they'll provide you with the funds to purchase your home.
Mortgage is sold to the secondary market: In many cases, the lender will sell the mortgage to investors in the secondary mortgage market, such as Fannie Mae or Freddie Mac. This allows the lender to make more loans and continue providing mortgage financing to borrowers.
Key points to remember:
The primary mortgage market is where home loans originate.
Banks, mortgage brokers, mortgage bankers, and credit unions are all primary lenders.
The secondary mortgage market is where existing mortgages are bought and sold.
A healthy primary mortgage market is essential for a strong housing market.
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