Mortgage Markets

• The mortgage industry consists of agencies that specialize in originating loans and agencies that purchase large bundles of loans and convert them into investment products. These processes work as a system or cycle with each area feeding off of the one before it. In effect, these processes contribute to the overall ability of the real estate market to grow and generate business. The loan origination process provides the primary mortgages needed to create the investment products that drive the secondary market's profits. These profits work to strengthen the mortgage industry.
  
  

Primary Mortgage Sales

• A primary mortgage is created whenever a home buyer signs off on a mortgage loan contract. In most cases, a home mortgage involves a long-term debt obligation that can take anywhere from 10 to 30 years to repay. Rather than tie up the monies lent in loan contracts, primary lenders, such as mortgage banks, have the option of selling bundles of mortgage notes. Some banks may opt to earn interest from their loans or from certain batches of loans. When sold, mortgage loans generate additional revenue streams that enable banks to free more money for financing mortgage notes.
  
  

Secondary Mortgage Sales

• The secondary mortgage market specializes in capitalizing on the earnings potential contained inside primary mortgage loan notes. Private organizations, such as credit unions and commercial banks, and public agencies, such as the Federal National Mortgage Association, regularly purchase bundles of mortgages from primary lenders. These businesses convert the earnings potential inside mortgage notes into mortgage-backed security investments. These products sell and trade on the stock market just like any other investment product type. Primary and secondary lenders can also profit from the interest earnings generated by the bundles of loan notes contained inside the product.
  
  

Market Effects

• The profits and losses generated by mortgage-backed security investments in the stock market have a direct effect on the rise and fall of mortgage interest rates. As with industry or market, a high demand for mortgage-backed securities generates revenue, which in turn strengthens the industry. When this happens, mortgage interest rate charges go down. As interest rates go down, the purchase of a home becomes more affordable for potential home buyers. As a result, sales rates for primary mortgages increase which further generate mortgage sales within the secondary market.