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Chapter 3 Primary and Secondary Markets

Chapter 3 Primary and Secondary Markets - Financing...

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Financing Residential Real Estate Lesson 3: The Primary and Secondary Markets
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Introduction In this lesson, we will cover: the distinction between the primary and secondary mortgage markets how primary market lenders get funds to make mortgage loans sale of loans on the secondary market mortgage-backed securities the secondary market agencies and their role in the mortgage industry
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Introduction The residential mortgage industry is made up of: financial institutions, private companies, government-sponsored enterprises, and other investors.
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The Two Mortgage Markets The industry is divided into two “markets” that supply funds for mortgage loans.
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The Two Mortgage Markets The industry is divided into two “markets” that supply funds for mortgage loans. Primary market Market where lenders make loans to home buyers.
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The Two Mortgage Markets The industry is divided into two “markets” that supply funds for mortgage loans. Primary market Market where lenders make loans to home buyers. Secondary market Market where lenders sell their loans to investors.
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Primary Market In primary market, home buyers apply for mortgage loans and lenders originate them. Loan origination involves: I processing the application, I approval decision, and I funding the loan.
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Primary Market Primary market was originally local, made up of community financial institutions. More complicated now, due to developments such as: I interstate banking I Internet lenders Local model still useful in understanding primary and secondary markets.
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Primary Market Local market is subject to real estate cycles. Real estate cycles = Periodic shifts in level of real estate activity (sales, loans). Real estate cycles
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Primary Market Local market is subject to real estate cycles. Real estate cycles = Periodic shifts in level of real estate activity (sales, loans). Caused by changes in supply of and demand for: I real estate for sale, and I funds for mortgage lending. Real estate cycles
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Primary Market Local real estate cycles are affected by many factors, including: I economic forces I political events I social trends These factors may be either local or national. Factors affecting real estate cycles
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Primary Market At one time, local lenders couldn’t do much about real estate cycles in their communities. Dealing with real estate cycles
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Primary Market They needed: 1. a source of extra funds to lend when demand exceeded supply; and 2. a place to invest surplus funds when supply exceeded demand. Dealing with real estate cycles
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Primary Market They needed: 1. a source of extra funds to lend when demand exceeded supply; and 2. a place to invest surplus funds when supply exceeded demand. Secondary market helped meet both needs. Dealing with real estate cycles
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Summary Primary Market i Primary market i Origination i Real estate cycles
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Secondary Market Solution to primary market problems: the secondary market.
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