chapter nineteen
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CHAPTER NINETEEN. THE SECONDARY MORTGAGE MARKET: PASS THROUGH SECURITIES. Chapter Objectives. Evaluation of secondary mortgage market and FNMA and GNMA Mortgage backed bonds and pass through securities Implications of borrower prepayment. Mortgage Markets. Primary mortgage market

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chapter nineteen



chapter objectives
Chapter Objectives
  • Evaluation of secondary mortgage market and FNMA and GNMA
  • Mortgage backed bonds and pass through securities
  • Implications of borrower prepayment
mortgage markets
Mortgage Markets
  • Primary mortgage market
    • Lenders and borrowers
  • Secondary mortgage market
    • Conduits, investment bankers and investors
    • Mortgage-backed securities
mortgage markets1
Mortgage Markets
  • Primary mortgage market
    • Lenders and borrowers
  • Secondary mortgage market
    • Federal National Mortgage Assoc. “Fannie Mae”
    • Federal Home Loan Mortgage Corporation “Freddie Mac”
depository lenders in the primary market
Depository Lenders in the Primary Market
  • Commercial Banks
  • Savings Institutions
nondepository lenders in the primary market
Nondepository Lenders in the Primary Market
  • Mortgage bankers
  • Mortgage brokers
  • Others
government sponsored mortgage programs
Government-Sponsored Mortgage Programs
  • FHA-Insured Loans
  • VA-Guaranteed Loans
fha insured loans
FHA- Insured Loans
  • FHA loans are made by private lenders through various programs (e.g. section203 loans)
  • FHA insurance protects the lender from losses due to default and foreclosure
  • FHA borrowers pay an up front premium, plus a monthly premium for FHA insurance
  • Maximum FHA loan amounts vary depending on an area’s median house price
  • Minimum down payment of three percent
va guaranteed loans
VA-Guaranteed Loans
  • VA loans are made by private lenders (available to U.S. Veterans)
  • VA guarantees the lender against loss up to 100% of a property’s value
  • VA charges a funding fee based on the size of the LTVR
  • Maximum VA loan amounts exist
  • No down payment is required and no discount points can be paid by the borrower
the secondary market
The Secondary Market
  • Federal National MTG. Assoc., FNMA (Fannie Mac)
  • Federal Home Loan Mtg. Assoc., FHLMC (Freddie Mac)
  • Government National Mtg. Assoc., GNMA (Ginnie Mae)
  • Life insurance companies and other purchases
fannie mae fnma
Fannie Mae, FNMA
  • FNMA was organized in 1938 to purchase FHA loans
  • FNMA reorganized in 1968 and authorized to purchase conventional mtgs. in 1970
  • FNMA obtains funds from the sale of its stock, its MBS, by issuing bonds, and from its earnings
  • The MBSs issued by FNMA and the mortgages they own account for 23 percent of the residential mortgage market
freddie mac fhlmc
Freddie Mac, FHLMC
  • FHLMC was created in 1970 to provide a secondary market for S&L associations
  • FHLMC currently buys both government- underwritten and conventional loans
  • Freddie Mac and Fannie Mae are now operationally similar
  • The MBSs issued by Freddie Mac and the mortgages they own represent 16 percent of the residential mortgage market
ginnie mae gnma
Ginnie Mae, GNMA
  • GNMA was created in 1968
  • GNMA guarantees the timely payment of principal and interest on MBSs (primarily FHA and VA pools)
  • GNMA also purchases mortgages designed by the FHA for low and moderate- income buyers
gnma payment guarantee
GNMA Payment Guarantee
  • GNMA was empowered to guarantee timely payment of PI, on
  • Securities backed by FHA, VA, and FmHA
  • GNMA resulted in an expansion of secondary market
  • Pass-through securities
  • Default risk minimized
operation of secondary market
Operation of Secondary Market
  • Direct sale programs
  • Mortgage-related security pools
direct sale programs
Direct Sale Programs
  • Originators
    • Mortgage companies
    • Thrifts
    • Commercial Banks
    • others
  • Buyers
    • Life insurance companies
    • Eastern thrifts
    • FNMA
    • FHLMC
mortgage related security pools
Mortgage Related Security Pools
  • MBBs
  • MPTs (pass through)
  • MPTBs (pay through)
  • CMOs
mortgage backed bonds
Mortgage- Backed Bonds
  • Fixed coupon rate
  • Specific maturities
  • Issuer retains ownership of mortgages
  • Mortgages pledged as security
  • Over collateralization
mortgage backed bonds continued
Mortgage- Backed Bonds Continued
  • Investment Rating
    • Quality
    • Diversification
    • Rates
    • Prepayment
    • Appraised value
    • DCR
pricing calculator solution
Pricing- Calculator Solution
  • n= semi annual periods
  • I= required rate
  • PV= present value of bond
  • pmt= semi annual interest payment (stated rate)
  • FV= par value
  • Requires 4 variables to solve for yield or PV
  • inverse relationships between interest rates and bond prices
mortgage pass through securities
Mortgage Pass-Through Securities
  • Mortgage originations are pooled by lenders or FNMA or FHLMC
  • Originators use a securities underwriter
  • Securities represent an individual interest in pool
  • Large or small investors
characteristics of mortgage pools
Characteristics of Mortgage Pools
  • Security issuers and guarantors
    • Pass through
    • Participation certificates
    • MBS
  • Default insurance
    • PMI- conventional
    • Guarantee- VA
    • Insured- FHA
characteristics of mortgage pools continued
Characteristics of Mortgage Pools Continued
  • Payment patterns
  • Coupon rates and interest rates
  • Geographic distributions
  • Borrower characteristics
  • Pool size
  • Prepayment considerations
  • All of the above can effect pricing