When it comes to real estate financing, we often think of it as a very simple process that banks lend you money to buy the house and in return you may the banks with interests and anything else after that is not your concern anymore. It is ok as a customer, because a customer will only deal with the bank when it comes to financing. This article will give you a general idea of what happens after the bank lends you the loan and how does this process plays part in the economy. If you are studying for real estate exams, I hope you will find some of the information here helpful.
As I said, the customer only concerns with the lender and the type of loan/term and interest rate. This whole relationship between customer and lender is taking place only in what's called the primary market economically. The primary market is consumer-oriented place where involves general consumers and commercial banks. credit unions and other lenders. This is where financial services occurred.
Now think about this, when a bank gives you $500K loan and tells you to pay it back in 30 years, that means the bank will have to wait for 30 years to get that $500K back in order to invest again. How is the bank going to deal with that? If every bank does that, there are not going to lend their money as easy as it is now, because there money will be stuck with you for a duration of time and it is going to be slow and inefficient way for them to make a living.
To solve this problem, the government comes up with something called the secondary market. This is where the bank takes the loan and find bigger investors to buy those loans and share the interest gain. Those bigger investors will buy these loans from the bank and therefore the bank will immediately have the money ($500K in out case) back and ready to lend again. In the context of real estate, the major secondary market investors are Freddie Mac, Fannie Mae and Ginnie Mae. I am sure you are all very similar with these names, and often you associate bad things with them.
However, their existence is essential to the economic success of capitalist society. These are government sponsored enterprises, which plays critical roles in keeping the capital circulating in the secondary market and in eventually flows back to the society. One of their biggest significance is to keep buying loans from the primary market lenders in order to keep them ready to lend. It is similar to the battle field where the first line of soldiers do the shooting and the second line do the delivery of bullets and other supplies.
Thanks
Until next time
As I said, the customer only concerns with the lender and the type of loan/term and interest rate. This whole relationship between customer and lender is taking place only in what's called the primary market economically. The primary market is consumer-oriented place where involves general consumers and commercial banks. credit unions and other lenders. This is where financial services occurred.
Now think about this, when a bank gives you $500K loan and tells you to pay it back in 30 years, that means the bank will have to wait for 30 years to get that $500K back in order to invest again. How is the bank going to deal with that? If every bank does that, there are not going to lend their money as easy as it is now, because there money will be stuck with you for a duration of time and it is going to be slow and inefficient way for them to make a living.
To solve this problem, the government comes up with something called the secondary market. This is where the bank takes the loan and find bigger investors to buy those loans and share the interest gain. Those bigger investors will buy these loans from the bank and therefore the bank will immediately have the money ($500K in out case) back and ready to lend again. In the context of real estate, the major secondary market investors are Freddie Mac, Fannie Mae and Ginnie Mae. I am sure you are all very similar with these names, and often you associate bad things with them.
However, their existence is essential to the economic success of capitalist society. These are government sponsored enterprises, which plays critical roles in keeping the capital circulating in the secondary market and in eventually flows back to the society. One of their biggest significance is to keep buying loans from the primary market lenders in order to keep them ready to lend. It is similar to the battle field where the first line of soldiers do the shooting and the second line do the delivery of bullets and other supplies.
Thanks
Until next time
