What is the distinction between the primary and secondary markets in mortgage lending?

The primary market in mortgage lending is where the actual creation of new loans takes place. In this market, lenders such as banks and credit unions provide funds directly to borrowers for the purpose of purchasing or refinancing real estate. These transactions involve the initial steps of the lending process, including loan applications, underwriting, and funding.

In contrast, the secondary market consists of the trading of existing loans and mortgage-backed securities. Investors buy these loans or securities to generate income, and this market helps to provide liquidity and stability to the primary market by allowing lenders to replenish their capital and continue originating new loans.

Understanding the primary market's role in creating new loans is crucial for grasping the overall structure of mortgage lending, as it lays the groundwork for the financial ecosystem that supports home financing. This is why the distinction made in the correct answer is important: it clearly articulates the primary market's function in the broader mortgage landscape.