Secondary Market

With the advent of new financial techniques and instruments of leveraging and risk taking, many new methods of mortgage selling have been invented.  One of the major methods of mortgage selling is the secondary mortgage market.

In the secondary mortgage market, loans are combined and sold as one instrument to investors, funds and banks around the industry. These collective loan instruments are known as CMOs, or collateralized mortgage obligations.

These instruments are also known as mortgage based securities or MBOs.  Loans are generally risky for the lender and the option of selling them as collateralized mortgage obligations help the lender of the loan to be more comfortable and open to taking such risks. He can provide more loans for his debts can be covered by selling the loans as collateralized mortgage obligations on the Secondary Mortgage Market.

Importance of CMOs:

These instruments allow the lender to lend his capital to more debtors and it makes for an easier loan market since the lender feels more confident in offering loans.  Because CMOs share the risk of the lender, the loan seeker or debtor can get more mortgages easily. Credit requirements can also be lowered for the mortgage.

Prudent investors who purchase these CMO instruments can benefit from a good investment if the CMOs are realized and the debtor succeeds in fulfilling his debt obligations. CMOs have also created a new capital market.  Generally debt obligations of the mortgage are between the lender and the debtor but because of the Collateralized mortgage instruments, the investors also become an interested party and since the risk of every mortgage defaulting is low it is generally considered a safe investment.

Non Performing Mortgages:

Non Performing Mortgages are those mortgages where the debtor has been unable to fulfill his principal and his interest obligations on the mortgage and has been insolvent. In this scenario the mortgage is considered to be lost and the bank will seize the property of the debtor under the mortgage. The property will be then sold off by the bank at a foreclosure and the purchase amount will be paid to the bank.  Generally, the banks are prudent in lending mortgages and carry out extensive background checks on mortgage seekers so that these types of scenarios can be avoided and they occur only in rare cases.

Whole Loan Trading:

Whole Loan Trading is done when the lender sells his compete loan on the secondary market and recovers his principal loan amount. In whole loan trading, the lender sells his loan to a buyer on the secondary market, and the buyer is deemed to receive the loan principal as well as the interest from the debtor of the loan during the term of the loan.  Many banks prefer to sell their whole loans so that they can recoup the principal of the loan and use that regained principal to offer new loans.

Mortgage Note Sales:

In Mortgage Note Sales, the mortgage note that denotes that the debtor will fulfill his promise to repay the loan with principal and interest within a fixed duration of 10-30 years is sold on the market.  If the debtor fails to repay the loan then the note owner can foreclose and sell the property under obligation for the loan.

It is because of the new methods of finance such as CMOs and Note Sales that it is easier to get mortgage, provided one is knowledgeable.