Mortgage loans are a means to obtain money to purchase a house or real estate.  Many people borrow the majority of the funds needed to buy their home, and then finance the remainder through a lending institution.  By doing this, they are able to spread the payments over an allotted period of time, usually 15 to 30 years.  What most people do not know is that many of their loans are then sold to another bank in the secondary market.

When a borrower is finding a bank to lend the money to purchase a house, they are searching in the primary market.  This is where the lender and borrower will agree upon the terms of the contract. The decisions to be made have to do with the principal being borrowed, the interest rate charged on the loan, and the length of time for repayment.

For a bank, this is a repetitive procedure that is completed for numerous amounts of people or businesses.  A loan does not have to be for a housing purchase, but can be made for several different reasons.   Doing such slowly eliminates the reserve funds that they have on hand.   Over time they can become depleted.

One of the primary sources of income for banking institutions is the interest that is paid by borrowers.  Therefore, the bank will want to have more capital to give to other people in the form of a loan. In order to do this, they will often sell the mortgages to an organization operating in the secondary market.

Once purchased, many of these companies bundle the purchases together and sell them as securities called collateralized debt obligations (CDO)or collateralized mortgage obligations (CMO), and other names.  These are sold on the stock market for investors to purchase shares in.  By doing this, the business hopes not only to cover the risk of default, but also profit from investors.

The borrower need not be worried about the possibility of losing their home because of this process.  The mortgage loans are not at risk.   However, the investor should worry if a significant amount of people default on their loans.  The process involving the secondary market can be very difficult to comprehend.