What is the Secondary Market?
One of the most important reasons for the growth of residential lending in recent years is the secondary market. The term secondary market refers to the market where existing mortgages are bought and sold.
Instead of originating loans solely for their asset portfolios and holding them throughout their term, lending institutions can package these loans and sell them in the secondary market. This gave lending institutions the ability to acquire funds for additional lending and, at the same time, transfer the interest rate risk to the buyer or investor.
When the bank makes a home-secured loan directly to a customer, a primary market transaction takes place. If the bank then sells the mortgage to an investor, this is a secondary market transaction. Primary lenders and permanent investors buy and sell existing mortgages in the secondary market.
As true doctor loans do not have private mortgage insurance (PMI), they are typically not sold in the secondary market as investors do not have an appetite for the risk/reward in this type of investment. Instead, the handful of banks who offer true doctor loans keep these loans in their portfolio and on their balance sheet.