How Do American Mortgages Work? Part 8: Investors

The end of the line for the secondary mortgage market process is the investors themselves. Investors can be anyone but typically are foreign governments, pension funds, insurance companies, banks, GSEs and hedge funds. What kind of return are they looking for depends on what credit ranking of MBS, CMOs, or CDOs they acquire. Typically, more safe investors such as governments, pension funds, insurance companies, or banks are looking for a high credit investment. These investments have low predicted default rate. Investors looking for higher returns will more than likely look towards a low credit rating investment because the interest rate will have a higher return yield, hedge funds are usually investors of this type.

While America’s secondary market is massive, after a mortgage is closed it can end up in many different channels by the end of the month, whether it be a CMO or a CDO deal. Borrowers have little knowledge of the extent of what happens with their mortgage after closing and how much it has been split up, traded, and merged with other mortgages. With the start …

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How Do American Mortgages Work? Part 1

Looking at an American mortgage from the outside can seem identical as a mortgage you would obtain in Ireland. You sign a contract, you’re given the keys to your new home in exchange for monthly payments for a set amount of years. But behind the scenes is where things get a little more complicated. The United States has created a secondary mortgage market after the Great Depression in the 1930’s. Since then, the secondary mortgage market is a multi-billion dollar corporation that has the single biggest taxpayer corporation in the US.

In simple terms, the secondary mortgage market includes Government-Sponsored Enterprises that act as the middle man between the mortgage lenders and the investors. They will buy residential loans off of lenders then securitise and trade them to investors. When the Government-Sponsored Enterprises buy a loan off a mortgage lender it returns the loan amount so the lender can turn around and lend to a new family. This allows more capital to be freed to help more families reach their goals of becoming a homeowner and invest in their future.

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The secondary insurance market 'settlements'

Often you hear about a ‘secondary market‘ and often it is related to bonds, in particular the likes of TBills (Tbills are US Government bonds that run less than 12 months, TNotes on the other hand run longer than a year). What this means is that there is a market which operates outside of the primary market – where the transaction first takes place. In the treasury realm (the likes of Tbills) the primary market is from the Government to the buyer – either institutional or private – and the secondary market is between (for instance) one private individual and another. Why does it exist? Simply because the maturity date on the bond may not suit the holder, so private individual A will sell to B rather than wait until the time the bond matures.

A Secondary market exists in many other areas too, one example is that of Life Assurance. There are companies …

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The secondary insurance market ‘settlements’

Often you hear about a ‘secondary market‘ and often it is related to bonds, in particular the likes of TBills (Tbills are US Government bonds that run less than 12 months, TNotes on the other hand run longer than a year). What this means is that there is a market which operates outside of the primary market – where the transaction first takes place. In the treasury realm (the likes of Tbills) the primary market is from the Government to the buyer – either institutional or private – and the secondary market is between (for instance) one private individual and another. Why does it exist? Simply because the maturity date on the bond may not suit the holder, so private individual A will sell to B rather than wait until the time the bond matures.

A Secondary market exists in many other areas too, one example is that of Life Assurance. There are companies …

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