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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

Real estate debt and equity markets
Real Estate Debt and Equity Markets

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