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Secondary Mortgage Market

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Definition: The secondary mortgage market allows banks to sell mortgages,  to investors such as pension funds and insurance companies. This gives the banks new funds to offer more mortgages to new borrowers. If banks had to keep these mortgages the full 15 or 30 years, they would soon use up all their funds, and potential homebuyers would have a more difficult time to find mortgage lenders.

Many of the mortgages on the secondary market are bought by Fannie Mae. Other are packaged into mortgage-backed securities, and sold to investors.

In September 2013, bank lending was finally coming back, thanks to a healing securitization market. This market disappeared after the 2008 financial crisis because so many investors got burned by bad mortgage-backed securities. In 2007, auto and credit card securities were at $178 billion. They plunged to just $65 billion by 2010. In 2012, they are projected to reach $100 billion, according to Standard & Poor's. (Source: Ian Salisbury, Marketwatch, How an Obscure Bond Play Could Help Consumers, August 25, 2012)

Why is this secondary market returning? Large investors are now more willing to take a chance with securitized loans from reputable banks  because Treasury note yields are at 200-year lows. The means the quantitative easing by the Federal Reserve is working. The Fed has been buying Treasuries, forcing yields lower, and making other investments look better by comparison.

The result? Banks now have a market for the securitized loan bundles. This gives them more cash to make new loans.

How It Affects You

This is especially great if you need a car loan, new credit cards or even a business loan. If you've applied for a loan recently and were turned down, try again. (Unless, of course, your credit score is below 720. In that case, your first step is to repair your credit. Here's somegreat free tips to repair your credit yourself by About.com's Guide to Credit, LaToya Irby.)

It's also great for economic growth. Consumer spending generates 70% of GDP. IN 2007, a lot of this was generated by credit card debt. After the financial crisis, shoppers either cut back on debt, or were denied access by panicked banks. A return of securitization means investors and banks are less fear-driven. Consumer debt will grow, boosting GDP.

 

Also Known As: secondary market

Examples: Fannie Mae buys mortgages from banks, a process known as buying on the secondary mortgage market.

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