What Is the Primary Mortgage Market?

The primary mortgage market is the market where borrowers can obtain a mortgage loan from
a primary lender. Banks, mortgage brokers, mortgage bankers, and credit unions are all
primary lenders and are part of the primary mortgage market.

How the Primary Mortgage Market Works

Homeowners can deal directly with primary lenders when shopping for a mortgage loan by
contacting their local bank. For most borrowers, they won't notice that they're dealing in the
primary mortgage market since they'll interact with their mortgage representative at their local
bank during the entire process. The mortgage professional will educate the borrower about
the various types of mortgages available and quote the interest rate depending on which type
was chosen. The local branch will usually be the location for the loan closing—where the
paperwork is signed.

Many borrowers also start the home-buying process by contacting a mortgage banker
or mortgage originator. Originators and mortgage bankers are not banks per se, but instead,
help facilitate the transaction and refer the mortgage request to a bank to close the loan. The
brokers get a fee for their service since they refer business to primary lenders. The borrowers,
on the other hand, stand to get a better rate by having the broker shop around for the best
deal depending on borrower's credit and the desired terms.

However, it's important to note that the Consumer Financial Protection Bureau has
implemented regulations regarding compensation for mortgage brokers. Before the financial
crisis, brokers could receive compensation from the borrower as well as the lender.
Consumers were unaware that the broker was getting paid by the lender when they paid their
fee. Also, brokers had incentives to steer consumers to more expensive products or
mortgages and sometimes, higher interest rates. Since the Great Recession of 2008 and
2009 and the resulting regulations that followed, the number of mortgage brokers has
declined.

The secondary mortgage market

Is the market for the sale of securities or bonds collateralized by the value of mortgage loans.
A mortgage lender, commercial banks, or specialized firm will group together many loans
(from the "primary mortgage market"[1]) and sell grouped loans known as collateralized
mortgage obligations (CMOs) or mortgage-backed securities (MBS) to investors such
as pension funds, insurance companies and hedge funds.[2] Mortgage-backed securities were
often combined into collateralized debt obligations (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—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.[3] In theory, the risk 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 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.[4] Delinquencies, defaults, and decreased real estate values could make CDOs difficult
to evaluate. This happened to BNP Paribas in August, 2007, causing the central banks to
intervene with liquidity.