After a mortgage closes, a lender will either hold that mortgage in its portfolio or sell it to investors. If the mortgage is sold, the lender then uses the proceeds to make new loans to other homebuyers.
Liquidity, in a mortgage sense, refers to how easy it is to raise funds to lend out as mortgages. Or, alternatively, it refers to the depth of buyers willing to buy mortgage assets.
When a mortgage market has good liquidity, lenders can sell large volumes of mortgages without substantially affecting the “price” they receive from investors. Good market liquidity therefore translates into better mortgage rates for consumers.
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