Mortgage Markets

What is a Mortgage?

A mortgage is a loan used to purchase real property such as house, lot and building. These
properties serve as the borrower’s collateral to protect the financial institutions in case of non-payment.

Mortgage Markets

The mortgage market is the underlying structure that supports home lending through
mechanisms that help with the free flow of funds so that lending can continue (Dehan A., 2021).

Types of Mortgages

1. Conventional Mortgages
 Most common type of mortgage
 Purposes: For primary, vacation and investment homes.
 Has stricter regulations on the credit score and the debt-to-income (DTI) ratio of
the buyers.
o Minimum Credit score required – 620
o Debt-to-income (DTI) ratio shall be low, which is ideally 50% or less.
o Borrowers who pay at least 3% down can qualify. However, take note
that if the down payment is at least 20%, paying of PMI is not required.
Otherwise, homebuyers need to pay PMI.
 The overall borrowing cost after fees and interest tends to be lower than an
unconventional loan.
2. Fixed-Rate Mortgages
 This type of mortgage has unchanging monthly payments. Meaning, the interest
rate and principal/interest payment remains the same throughout the duration
of the loan.
 This is helpful and easier in planning a budget.
3. Adjustable-Rate Mortgages
 This type of mortgage is contrary to fixed-rate mortgage.
 These are 30-year loans with interest rates that change depending on how
market rates move.
4. Government-Backed Loan
 Less risky for lenders because these are insured by Government agencies
 Types (in USA):
o FHA Loans
o USDA Loans
o VA Loans
 Types (in the Philippines):
o Interim Rehabilitation Support To Cushion Unfavourably-affected
Enterprises by Covid-19 (I-RESCUE).
o Pagbabago at Pag-asenso (P3).
o Micro, Small, Medium Enterprise (MSME) Credit Guarantee Program.
 o COVID-19 Assistance to Restart Enterprises (CARES).
o Rehabilitation Support Program on Severe Events (RESPONSE).
o Rice Farmer Financial Assistance (RFFA).
o Survival and Recovery Loan (SURE) for small farmers and fishers.
 Less strict qualification requirements than conventional loans.
5. Jumbo Loans
 A mortgage used to finance properties that are too expensive for a conventional
conforming loan.
 Requirements:
o Credit score of 700 or higher
o Significant assets
o Low DTI ratio
o Large down payment, typically ranging between 10-20%

Conclusion: To end, we must always remember that the ideal type of mortgage relies on the situation
and preferences of the prospective buyers of real properties.

References:

 Kielar, H. (2022, May 13). 7 Types Of Home Loans For All Home Buyers. ROCKET

Mortgage. https://www.rocketmortgage.com/learn/types-of-mortgages

 What is a mortgage? (2022, February 22). Consumer Financial Protection Bureau.

https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-en-99/

 Crone, E. S. (2022, July 2). Jumbo Loans: When a Regular Mortgage Isn’t Enough.

NerdWallet. https://www.nerdwallet.com/article/mortgages/jumbo-loans-what-you-need-

to-know
The mortgage market is split into two main components: a primary mortgage market
and a secondary mortgage market.

The primary mortgage market is the market where borrowers can obtain a mortgage loan
from a primary lender. Banks, mortgage brokers, mortgage bankers, and credit unions are
all primary lenders and are part of the primary mortgage market.

How the Primary Mortgage Market Works

Homeowners can deal directly with primary lenders when shopping for a mortgage loan
by contacting their local bank. For most borrowers, they won’t notice that they’re dealing
in the primary mortgage market since they’ll interact with their mortgage representative
at their local bank during the entire process. The mortgage professional will educate the
borrower about the various types of mortgages available and quote the interest rate
depending on which type was chosen. The local branch will usually be the location for
the loan closing—where the paperwork is signed.

One of the weaknesses of the primary mortgage market comes down to the structure of
mortgage loans themselves. They’re designed to be long-term investments. (For this
reason, if banks and mortgage originators held onto loans for the life of the term, they
would have to wait up to 30 years to be fully paid back. This would limit the amount of
funding available for people to get homes.)

Benefits of the Primary Mortgage Market

There are some benefits available to borrowers who transact in the primary mortgage
market, which can include:

Low Closing Costs

Primary lenders are typically locally-owned banks, which means that they do the credit
analysis and underwriting process. Underwriters review a borrower’s financial
information and credit history to decide whether to extend credit or deny the loan. Also,
local banks prepare all of the paperwork and documentation in-house instead of going
through a centralized unit out of state as is the process for some large banks. The result
can be lower fees with a local bank since they have less overhead versus a larger bank.
Also, if a mortgage broker got involved in finding the bank, a fee will be assessed as
well. In short, opting for a locally-run bank for a primary mortgage can help reduce
closing costs.

Small Down Payments

Typically, the down payment for a mortgage is 20% of the purchase price of the home.
However, a borrower can put down less money, and many primary lenders offer a 10
percent downpayment.
For low-to-moderate income borrowers, an FHA loan offers a down payment as low as
3.5% of the value of the home. FHA is the Federal Housing Administration, which offers
insurance to lenders so that they can issue loans to low-income borrowers.2

However, a down payment of less than 20% triggers the need for the borrower to
purchase private mortgage insurance or PMI. PMI protects banks and lenders in case the
borrower defaults on the mortgage. PMI is a monthly fee charged to the borrower until
20% of the mortgage loan has been paid off.3

Flexibility
Because the originators of the loan are typically locally-owned banks, it is more likely
that the borrowers will be able to communicate with the people who get the final say,
which is unlikely to happen at a national bank. The direct contact can provide flexibility
if the borrowers have a unique financial situation.

The flexibility can include offering a fixed-rate 15-year versus a 30-year mortgage if the
borrower is looking to pay off the loan sooner. Some of the advantages to a 15-year
mortgage include less total interest charges since it’s paid off earlier. Also, borrowers can
usually negotiate a lower interest rate since there’s less risk of the borrower defaulting, or
not paying off the loan due to financial hardship. Of course, a big advantage to a 30-year
mortgage is that it offers lower payments since they’re spread out over a longer period
versus other terms.

SECONDARY MORTGAGE MARKET

The secondary mortgage market is a marketplace where home loans and servicing rights
are bought and sold between lenders and investors. A large percentage of newly
originated mortgages are sold by the lenders who issue them into this secondary market,
where they are packaged into mortgage-backed securities and sold to investors such as
pension funds, insurance companies, and hedge funds. It enables investors to buy
mortgage-backed securities (MBS), entitling them to principal and interest from
mortgage payments.

The secondary mortgage market is extremely large and liquid, and helps to make credit
equally available to all borrowers across geographical locations.

How the Secondary Mortgage Market Works

Several players participate in the secondary mortgage market: mortgage originators,
mortgage aggregators (securitizers), and investors.

When a person takes out a home loan, the loan is underwritten, funded, and serviced by a
financial institution, usually a bank. Known as mortgage originators, banks use their own
funds to make the loan, but they can’t risk eventually running out of money, so they often
will sell the loan on the secondary market to replenish their available funds, so they can
continue to offer financing to other customers.
Depending on its size and sophistication, a mortgage originator might aggregate
mortgages for a certain period of time before selling the whole package; it might also
sell individual loans as they are originated.

The loan or loans is often sold to large aggregators. The aggregator then distributes
thousands of similar loans in a mortgage-backed security (MBS).1 After an MBS has
been formed (and sometimes before it is formed, depending upon the type of the MBS), it
is sold to a securities dealer. This dealer, often a Wall Street brokerage firm, further
package the MBS in various ways and sell it to investors, who are often seeking income-
oriented instruments. These investors don’t get control of the mortgages, but they do
receive the interest income from the borrowers’ repayments.

References:

https://www.quickenloans.com/learn/how-does-the-mortgage-market-work

https://www.investopedia.com/terms/p/primary_mortgage_market.asp

https://www.investopedia.com/terms/s/secondary_mortgage_market.asp