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Chapter 10. The Secondary Mortgage Market. 10-1. Chapter 10 Learning Objectives. Understand the workings of the secondary mortgage market

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chapter 10

Chapter 10

The Secondary Mortgage Market

chapter 10 learning objectives

10-1

Chapter 10Learning Objectives
  • Understand the workings of the secondary mortgage market
  • Understand why the secondary mortgage market is important for a more efficient allocation of funds in the real estate market, and what the major secondary mortgage market agencies are
secondary mortgage market

10-2

Secondary Mortgage Market
  • Market where existing mortgages are bought and sold
  • Mortgages are used as collateral for mortgage related securities
  • Reduces reliance on deposits
secondary mortgage market participants

10-3

Secondary Mortgage Market Participants
  • FANNIE MAE, GINNIE MAE, FREDDIE MAC
  • Securitization of Mortgages
  • Mortgage Related Securities
    • Pass-throughs
    • Mortgage-backed bonds
    • Collateralized mortgage obligations (CMO’s) and Remics
commercial mortgage backed securties cmbs
COMMERCIAL MORTGAGE BACKED SECURTIES (CMBS)
  • Started with S&L crisis of 1980s when RTC packaged commercial loans of failed thrifts and sold CMBSs
  • Senior tranche received all principal payments including prepayments
  • Subordinated tranche bore all losses from defaults
cmbs cont
CMBS (cont.)
  • Securitization process is same as for CMOs with different tranches
  • May be backed up by many mortgages on many properties, a single loan on a very large property, or a single loan on many properties
  • Loans are credit rated and contributed to a REMIC
secondary mortgage market7

10-4

Secondary Mortgage Market
  • FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE)
    • Established in 1938 to buy FHA loans
    • Re-chartered in 1954 and became a private corporation
    • As of 1970, allowed to buy FHA,VA, and conventional mortgages
secondary mortgage market8

10-5

Secondary Mortgage Market
  • GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)
    • Created in 1968 within HUD
    • Does not purchase mortgages or issue securities
    • Market focus is to guarantee FHA and VA pass-through securities
secondary mortgage market9

10-6

Secondary Mortgage Market
  • FEDERAL HOME LOAN MORTGAGE CORPORATION (FREDDIE MAC)
    • Established in 1970 to create a secondary mortgage market for conventional mortgages
    • Operates as a private corporation
    • Currently buys FHA, VA, and conventional mortgages
secondary mortgage market10
Secondary Mortgage Market
  • Freddie Mac purchases both newly issued and seasoned (those with some expired term) mortgages
  • Freddie Mac will also purchase construction/permanent loans that are FRMs, ARMs, or balloon/reset. These must be new dwellings and not rehabs.
secondary mortgage market11
Secondary Mortgage Market
  • Freddie Mac issues a wide variety of securities:
    • Discount Notes and Debentures
    • Mortgage Participation Certificates (Pass-throughs) on FRMs, ARMs, and multifamily
    • Collateralized Mortgage Obligations in several classes or tranches
    • Guaranteed Mortgage Certificates – not sold since 1979
secondary mortgage market12
Secondary Mortgage Market
  • Federal credit agencies that support the primary and secondary mortgage markets:
    • Farm Credit System consolidated three agricultural agencies to make direct loans for agricultural purposes
    • Federal Agricultural Mortgage Corporation (Farmer Mac) to underwrite pools of farm mortgages through pass-throughs
secondary mortgage market13
Secondary Mortgage Market
  • Federal credit agencies that support the primary and secondary mortgage markets:
    • Rural Housing Service extends loans to rural areas for farms, houses, and community facilities
    • Financing Corporation formed in 1987 to recapitalize the FSLIC
regulation of government sponsored enterprises
Regulation of Government-Sponsored Enterprises
  • GSEs are not officially part of the federal government
  • They appear to enjoy the backing of the federal government
  • Federal government does not guarantee these agency’s obligations but Congress has implied that federal funds might be expended to pay off investors
regulation of government sponsored enterprises15
Regulation of Government-Sponsored Enterprises
  • GSEs operate similarly to thrifts in purchasing long-term mortgages
  • They face interest rate risk, default risk, and management/operating risk
  • Office of Federal Housing Enterprise and Oversight (OFHEO) oversees the operations of the GSEs