| Part of a series on |
| Financial markets |
|---|
 |
| Bond market |
| Stock market |
| Other markets |
| Alternative investment |
| Over-the-counter (off-exchange) |
| Trading |
| Related areas |
Thesecondary mortgage market is the market for the sale ofsecurities orbondscollateralized by the value ofmortgage loans. A mortgage lender,commercial bank, or specialized firm will group together many loans (from the "primary mortgage market"[1]) and sell grouped loans known ascollateralized mortgage obligations (CMOs) ormortgage-backed securities (MBS) to investors such aspension funds, insurance companies andhedge funds.[2] Mortgage-backed securities were often combined intocollateralized debt obligations (CDOs), which may include other types of debt obligations such as corporate loans.
The secondary mortgage market was intended to provide a new source ofcapital for the market when the traditional source in one market—such as aSavings and loan association (S&L) or "thrift" in theUnited States—was unable to. It also was hoped to be moreefficient than the old localized market for funds which might have a shortage or surplus depending on the location.[3] In theory, therisk of default onindividual loans was greatly reduced by this aggregation process, such that even high-risk individual loans could be treated as part of an AAA-risk (safest possible) investment.
On the other hand, mortgagesecuritization undid "the connection between borrowers and lenders", such that mortgage originators no longer had a direct incentive to make sure the borrower could pay the loan. While historically in the US, fewer than 2% of people lost their homes to foreclosure; rates were far higher during theSubprime mortgage crisis.[4]Delinquencies,defaults, and decreasedreal estate values could make CDOs difficult to evaluate. This happened toBNP Paribas in August, 2007, causing thecentral banks to intervene withliquidity.
