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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.

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References[edit]

  1. ^ Definition of 'Primary Mortgage Market' "The market where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction ..."
  2. ^ Investopedia 'Primary Mortgage Market'
  3. ^ All the Devils Are Here, MacLean and Nocera,p.5
  4. ^ All the Devils Are Here, MacLean and Nocera, p.19

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