Primary market

Key Takeaways

• The primary market is where borrowers and the people who originate loans come together, and it is the place a mortgage is created.
• Banks, credit unions, and licensed mortgage brokers and loan originators all work in the primary market.
• Every loan begins in the primary market, including loans that Fannie Mae or Freddie Mac buy weeks later.
• In Washington, a person who assists a borrower in obtaining a residential mortgage loan for compensation needs a license under chapter 19.146 RCW.

What It Means

The primary market for mortgages is where borrowers who want a real estate loan and the people who originate loans come together. It is the part of housing finance a buyer sees: the application, the credit pull, the rate quote, the appraisal, and the signing table. When the papers are signed and the money is disbursed, a loan exists that did not exist before.

Several kinds of businesses work this side of the fence. Commercial banks and savings institutions lend deposits they hold. A Credit Union lends to its own members. A Mortgage Broker arranges the financing and places the borrower with a lender that funds it. From a buyer's chair they can look almost identical, because each takes an application and hands back a rate.

What none of them do here is resell the loan. That happens next door, in the Secondary Mortgage Market, and often within weeks of closing. Keeping the two straight matters because the primary market is defined by creation, not by ownership. A loan sold three times over its life was still created exactly once, in the primary market.

How It Works in Washington

Washington regulates the primary market closely, which is why this is the market a licensee runs into by name. Under chapter 19.146 RCW, the Mortgage Broker Practices Act, a mortgage broker is a person who for direct or indirect compensation assists a borrower in obtaining or applying to obtain a residential mortgage loan, and a loan originator is the individual who takes the application or negotiates the terms. RCW 19.146.200 provides that a person may not engage in that business without first obtaining and maintaining a license, which the Department of Financial Institutions issues.

The lenders themselves are chartered under separate acts. A state-chartered commercial bank operates under Title 30A RCW, the Washington Commercial Bank Act, and a state-chartered credit union under chapter 31.12 RCW, the Washington State Credit Union Act. Both are supervised by the Department of Financial Institutions as well.

Whatever the lender's charter, the loan created here takes the same form. The borrower signs a promissory note and secures it with a Deed Of Trust under chapter 61.24 RCW, which RCW 61.24.020 makes subject to all laws relating to mortgages on real property and enforceable by trustee's sale.

Example

The Ellis family agrees to buy a house in Spokane Valley for $385,000. They apply at a Spokane credit union where Dana Ellis has been a member for years. The credit union pulls credit, orders an appraisal, and approves a 30-year fixed loan with 10 percent down, so the Ellises bring $38,500 to closing and borrow $346,500.

Everything in that paragraph happened in the primary market. At closing the Ellises sign a promissory note for $346,500 and a deed of trust that is recorded in Spokane County, and the credit union wires the money. The loan now exists. Two months later the credit union sells it to Fannie Mae and gets its $346,500 back to lend again, which is the secondary market at work. The Ellises' loan was created once, in Spokane, and only its owner changed after that.

Common Mistakes and Exam Traps

• The primary market is where a loan is created, not where a house is sold. Buyer and seller negotiate price in the real estate market; borrower and lender create the loan in the primary market.
• Primary does not mean first lien. A second mortgage taken out at a bank was also created in the primary market.
• In Washington a mortgage broker is defined by assisting a borrower in obtaining a loan, not by lending its own money. Working in the primary market does not require funding the loan.
• Fannie Mae and Freddie Mac are not primary market lenders. They buy finished loans, so any answer placing them across the table from the borrower is wrong.