Primary and Secondary Mortgage Markets

The key economic function of a mortgage lender is to provide funds for the purchase or refinancing of residential properties. This function takes place in the primary mortgage market where mortgage lenders originate mortgages by lending funds directly to homeowners. This market contrasts with the secondary mortgage market. In the secondary mortgage market, lenders and investors buy and sell loans that were originated directly by lenders in the primary
mortgage market. Lenders and investors also sell and purchase securities in the secondary market that are collateralized by groups of pooled mortgage loans.

Banks that use the secondary market to sell loans they originate do so to gain flexibility in managing their long-term interest rate exposures. They also use it to increase their liquidity and expand their opportunities to earn fee-generated income.

The secondary mortgage market came about largely because of various public policy measures and programs aimed at promoting more widespread home ownership. Those efforts go as far back as the 1930s. Several government-run and government-sponsored programs have played an important part in fostering home ownership, and are still important in the market today. The Federal Housing Administration (FHA), for example, encourages private mortgage lending by
providing insurance against default. The Federal National Mortgage Association (FNMA or Fannie Mae) supports conventional, FHA and Veteran’s Administration (VA) mortgages by operating programs to purchase loans and turn them into securities to sell to investors.

Most of the loans mortgage banks sell are originated under government-sponsored programs. These loans can be sold directly or converted into securities collateralized by mortgages. Mortgage banks also sell mortgages and mortgage-backed securities to private investors. Mortgage-backed securities, in particular, have attracted more investors into the market by providing a better blend of risk profiles than individual loans.

Background of mortgage banking, the basics of mortgage banking

Depository institutions have traditionally originated residential mortgage loans to hold in their loan portfolios, and mortgage banking is a natural extension of this traditional origination process. Although it can include loan origination, mortgage banking goes beyond this basic activity. A bank that only originates and holds mortgage loans in its loan portfolio has not engaged in mortgage banking as defined here.

Mortgage banking generally involves loan originations , purchases, and sales through the secondary mortgage market. A mortgage bank can retain or sell loans it originates and retain or sell the servicing on those loans. Through mortgage banking, national banks can and do participate in any or a combination of these activities. Banks can also participate in mortgage banking activities by purchasing rather than originating loans.

The mortgage banking industry is highly competitive and involves many firms and intense competition. Firms engaged in mortgage banking vary in size from very small, local firms to exceptionally large, nationwide operations. Commercial banks and their subsidiaries and affiliates make up a large and growing proportion of the mortgage banking industry.

Mortgage banking activities generate fee income and provide cross-selling opportunities that enhance a bank’s retail banking franchise. The general shift from traditional lending to mortgage banking activities has taken place in the context of a more recent general shift by commercial banks from interest income activities to non-interest, fee generating activities.

Obama proposes mortgage-deduction cut in budget 2010

the Obama administration’s new fiscal year 2010 budget proposes to cap the mortgage deductions on “higher income” households — well, if you consider making $208,850 extremely high income.
“The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent — and the initial reserve fund would be funded in part through this provision This provision would raise $318 billion over 10 years.”

The Wall Street Journal reports …

Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments.

The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.

During his presidential campaign, Mr. Obama promised not to raise taxes on families earning under $250,000 a year, and the administration said that this plan would roughly line up with that limit.
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