Housing market or more specifically mortgage market has two distinct sections that are sometimes thinly connected. The recent crisis about blighted titles on mortgages and missing paper trail of legitimate claims on a properties, which lead to several big lenders halting their foreclosure proceeding, attest of that thin connection. The two distinct pieces of the mortgage market are usually known as

1) Primary Mortgage Market, and
2) Secondary Mortgage Market

The primary mortgage market is primarily concerned with originating a loan and involves interaction between borrower and lender. Secondary mortgage market is the arena where loans that have been originated already get traded like an asset or a security. This happens after the fact and does not affect the borrower/homebuyer in any material way, until, maybe when default occurs.

Lets look at two sections of the mortgage market one by one, starting with primary mortgage market. The link below shows different participants and various steps they are involved in or go through and make up primary mortgage market.

Primary Mortgage Market

Different steps that a borrower sees in the primary morgage market are as follows:

1. A person is looking for a house to buy. He is now considered a homebuyer.

2. He gets in touch with a real estate agent who helps him in finding the appropriate house. A lot of homebuyers skip this step and search for the house themselves.

3. Homebuyer finds the house that he likes and wishes to buy. He usually doesn’t have the cash required to close the deal. So, he is in urgent need of funds.

4. He gets in touch with a mortgage agent from whom he can get the funds. There are various ways and resources available to him, including his present or local Bank, which he can utilize. He fills out a loan application detailing his financial situation to the lender with the intent of proving his ability to repay the loan.

5. Lender or the Bank reviews the application. This process is called “underwriting the loan”. Bank verifies borrower’s financial details such as assets, liabilities, cash flows, credit history etc as well as details about the property in question.

6. If the Bank makes a judgement that the borrower has good ability to repay the loan and property can serve as a good collateral then loan application is approved.

7. Bank lends the money. The borrower sees this money at the time of closing on the house. Funds are distributed to the parties involved. Borrower makes a promise to repay the loan in a legal document (promissory note), and lenders uses property as a collateral against the loan (mortgage).

8. A mortgage is born. The Bank may keep the mortgage or sell it later (just like an asset) to someone else in what is called a secondary mortgage market. Banks usually fork out the job of collecting monthly payments from the borrower to another company, called the servicing company. Although some of the big mortgage banks service their own mortgages and do not utilize an outsourcing company.

From this point onwards, borrower is not really concerned about which company is holding his mortgage. All he cares about is knowing where to send the monthly mortgage payments and whom can he approach to get on-going support and help in making those payments.