The secondary mortgage market is the market for the sale of

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any fo ...

or bonds collateralized by the value of

mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...

s. A mortgage lender,

commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with co ...

, or specialized firm will group together many loans (from the "primary mortgage market") and sell grouped loans known as

collateralized mortgage obligation A collateralized mortgage obligation (CMO) is a type of complex debt security that repackages and directs the payments of principal and interest from a collateral pool to different types and maturities of securities, thereby meeting investor need ...

s (CMOs) or mortgage-backed securities (MBS) to investors such as

pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...

s, insurance companies and

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...

s. Mortgage-backed securities were often combined into

collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Le ...

s (CDOs), which may include other types of debt obligations such as corporate loans. The secondary mortgage market was intended to provide a new source of capital for the market when the traditional source in one market—such as a Savings and loan association (S&L) or "thrift" in the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., federal district, five ma ...

—was unable to. It also was hoped to be more efficient than the old localized market for funds which might have a shortage or surplus depending on the location. In theory, the

risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...

of default on individual loans was greatly reduced by this aggregation process, such that even high-risk individual loans could be treated as part of an AAA-risk (safest possible) investment. On the other hand, mortgage

securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...

undid "the connection between borrowers and lenders", such that mortgage originators no longer had a direct incentive to make sure the borrower could pay the loan. While historically in the US, fewer than 2% of people lost their homes to foreclosure; rates were far higher during the

Subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the coll ...

.''All the Devils Are Here'', MacLean and Nocera, p.19 Delinquencies, defaults, and decreased

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

values could make CDOs difficult to evaluate. This happened to

BNP Paribas BNP Paribas is a French international banking group, founded in 2000 from the merger between Banque Nationale de Paris (BNP, "National Bank of Paris") and Paribas, formerly known as the Banque de Paris et des Pays-Bas. The full name of the gro ...

in August, 2007, causing the

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...

s to intervene with

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liqu ...

References

External links

Current Mortgage-Backed Security (MBS) Prices
United States housing bubble {{Econ-stub

See also

References

External links