A Primer on “The Black Box”

January 4, 2021

The secondary mortgage market marketplace can be a confusing place, but Orion believes it is important for our brokers to understand the basics. Let’s jump in with some helpful explanations.


Versus the primary markets, which are brokers and MLOs working with borrowers, the secondary market is comprised of banks, investors, and financial institutions that trade mortgages, servicing rights and mortgage-backed securities, and it has a massive impact on the mortgage a borrower qualifies for and the rate they pay. After a lender extends money to the homebuyer, it could keep the loan on its books for the loan’s term, but the lender often doesn’t hold the loan, instead selling the loan into the secondary mortgage market. This enables Orion and other lenders use their limited capital efficiently, generating fees for underwriting mortgages, selling the mortgage, and then using capital again to fund new loans.

Many loans that are brokered to Orion are sold to the government-sponsored enterprises Fannie Mae and Freddie Mac, or other aggregators (including mortgage originators themselves), which can earn fees from repackaging the loans as MBS that appeal to specified investor needs, or hold them on their own books and collect the interest from borrowers. Servicing rights (the right to collect the monthly principal and interest payment) may or may not be retained, which can be a lucrative stream of fees. The servicer receives a fee for processing the monthly payment, tracking the loan balance, generating tax forms, and managing escrow accounts, among other functions. Mortgage Servicing Rights (MSRs) can be very volatile as we saw in March and April of last year.

To be sold to the agencies, the loan must be “conforming”: The loan must meet certain standards set by the agencies. These factors include a maximum loan amount and debt to income ratio, and a minimum down payment percentage and credit score. The demand for conforming loans helps push down the mortgage rates for borrowers who can meet the standards.


Even amongst conforming loans, mortgages can be sliced into tranches with varying degrees of safety(the safer the bond, the lower its yield). Investors looking for a higher interest payment can buy the somewhat riskier mortgage-backed securities. Investors looking for other traits (e.g. based on risk, or timing of cashflows) can find other MBS bonds to meet their specific needs. Investors have appetite for exposure to specific kinds of securities that better meet their needs and risk tolerance, and that fuels demand in the space.


To put it succinctly, the secondary market exists to create more efficiency and better meet the needs of the players in the space, driving a lot of the behavior in the primary market. And Orion is constantly monitoring activity in the secondary markets to help our brokers deliver the best programs and pricing to you.

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