The Process of Moving a Loan from the Primary to the Secondary Mortgage Market
What is the correct order of steps showing the process a loan goes through to get from the primary to the secondary mortgage market?
Primary vs. Secondary Mortgage Market Process
In the process of moving a loan from the primary to the secondary mortgage market, the correct order of steps is as follows:- Second
- Fourth
- First
- Fifth
- Third
Understanding the Process
Step 1: Lending institutions market their loan to the secondary market
Step 2: A secondary mortgage market institution purchases the loan
Once a lending institution finds a buyer in the secondary market, a secondary mortgage market institution will purchase the loan. This transaction allows the loan to transition from the primary market to the secondary market as the secondary market institution takes ownership.Step 3: Loans are packaged into a mortgage-backed security (MBS)
The loans acquired by the secondary market institution are bundled together to create a mortgage-backed security (MBS). This financial instrument represents a collective pool of mortgage loans that will be sold to investors.Step 4: Investors purchase shares of the MBS
Individuals, financial institutions, or other entities can invest in the MBS by purchasing shares. By doing so, investors become partial owners of the underlying mortgage loans within the MBS.Step 5: Money received from investors is used to purchase additional loans
The funds received from investors who buy shares of the MBS are reinvested to acquire more loans. This cycle allows the secondary mortgage market institution to maintain its loan inventory and continue creating MBSs for sale to investors. By following these steps in order, a loan successfully transitions from the primary market to the secondary market, where it is securitized and sold to investors as part of a mortgage-backed security.