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Definition: Primary Mortgage Market
A primary mortgage market is one in which borrowers and mortgage lenders (or originators) converge together to negotiate terms and carry out mortgage transactions, contrasted with a secondary mortgage market. Hence in simpler words, the mortgage market in which loans are originated, and which consists of lenders such as commercial banks, savings & loan associations, community savings banks is known as the primary mortgage market. The segment of the mortgage market where mortgage origination takes place is known as the primary mortgage market.
For example: Upon financing a home with a mortgage loan, the home owner and the lender are engaging in business on the primary mortgage markets.
While a mortgage is spoken of hand in hand with home financing, there are several lending options available at the time of purchase from a primary mortgage market. Primary lenders who are a part of the primary mortgage market can loan directly to consumers. Primary lenders service the loans for the life of the loan. Generally primary lenders are local institutions and community banks. This brings with it the advantage of flexibility in lending, and low closing costs, as the underwriting and loan documentation are often performed in house. Primary mortgage lenders can be of ‘Mortgage Bankers’ or ‘Portfolio Lenders’ categorization.
The primary mortgage market consists of mortgage brokers, mortgage bankers, credit unions and commercial banks. A mortgage lender, commercial bank or specialised firm will group together the loans from the primary mortgage market, and securitized into financial instruments as MBS, CDO or ABS.
From the primary mortgage market, most mortgages are sold and transitioned into the secondary mortgage market as a mortgage backed security (MBS), collateralized debt obligation (CDO) or asset backed security (ABS). These are sold to pension funds, insurance companies, and hedge funds.
Primary mortgage markets are affected by events in the secondary mortgage markets, as seen in the US subprime mortgage crisis of 2007-08. An understanding of the secondary mortgage markets will be essential for anyone considering applying for a mortgage loan, because, the interest rates and underwriting standards are heavily influenced by investors in the secondary market.