A secondary mortgage market can be defined as a market that allows exchange of mortgage loans as well as servicing rights between mortgage originators, mortgage aggregators and investors. Secondary mortgage markets allows mortgages together with servicing rights to be liquid. Mortgages are often sold into the secondary market by originators. They are then packaged as mortgage-backed financial assets which are sold to institutional investors such as insurance companies, hedge funds and pension funds. This paper discusses the advantages of a secondary mortgage market.
The chief importance of a secondary mortgage market is that it provides liquidity. A secondary market allows cash-strapped mortgage originators to sell their rights and obtain cash to meet pressing needs or to engage in alternative investments. The presence of a secondary market also gives mortgage originators assurance that their investment can easily translate into cash when need arises. Mortgages are often involves contracts with lengthy time periods. Therefore, the assurance attracts persons who would not have otherwise taken mortgages to take mortgages.
Secondly, secondary mortgage markets also allows trading of risks and provides room for speculation. The market allows speculators to purchase or sell securities based on their prediction of future performance of the securities. It also allows risk averse investors to exit the market when it becomes volatile by selling their financial assets.
Thirdly, secondary mortgage markets encourages the public to engage in the real estate sector. The relevant regulatory body oversees trading and ensures good trading education the public. In the public awareness and interest on the mortgage sector is elicited.
Fourthly, secondary mortgage markets encourages a saving culture and investment culture in the public. Persons need to save to participate in the market. Participation in the market results in investments with the saved funds. A positive return can encourage the public to save even more than before. The savings can be channelled through the financial system to provide loans to businesses that can use them to enhance their productivity or expand their operations. Consequently, it results in an increase in the gross domestic product (GDP) and a reduction in the unemployment rates.
Fifthly, existence of a secondary mortgage market allows for safe transactions. An existing secondary market will necessitate formation of a body to govern its operations and guide interaction of the various parties. The regulations protect both parties from unscrupulous and fraudulent people. Lack of a secondary market may force mortgage originators to engage in unregulated transactions if they are desperate for money which may make them lose their investment. For instance, transactions with shylock who charge obscene interest rates. Investors may also deal with conmen masquerading as mortgage originators when in fact they are not.
Lastly, secondary mortgage market can act as a barometer of the economy. The movement of the prices of financial securities often mirror the economic cycles in the economy. During recession prices decline and stagnate at the lowest price during depression while during recovery prices increase and achieve the highest price during boom periods. Therefore, policy makers can use data from the secondary mortgage market to predict movement of the economy allowing for appropriate policy measures to be implemented.
In conclusion, there are various importance of having a secondary mortgage market. The advantages could be to the individuals or institutions participating in the market. Besides, they could also spill over to the macro economy.
References
Gibson, C. (2012). Financial Reporting and Analysis. London: Cengage Learning.
Khan, W. (2004). Financial Management: Text, Problems And Cases. New York: Tata McGraw-Hill Education.
Shim, J., & Siegel, J. (2008). Financial Management (New ed.). New York: Barron's Educational Series.
