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Chapter 10 The Secondary Mortgage Market Chapter 10 The Secondary Mortgage Market

10 -1 Chapter 10 Learning Objectives n Understand the workings of the secondary mortgage 10 -1 Chapter 10 Learning Objectives n Understand the workings of the secondary mortgage market n 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

10 -2 Secondary Mortgage Market n Market where existing mortgages are bought and sold 10 -2 Secondary Mortgage Market n Market where existing mortgages are bought and sold n Mortgages are used as collateral for mortgage related securities n Reduces reliance on deposits

10 -3 Secondary Mortgage Market Participants n FANNIE MAE, GINNIE MAE, FREDDIE MAC n 10 -3 Secondary Mortgage Market Participants n FANNIE MAE, GINNIE MAE, FREDDIE MAC n Securitization of Mortgages n Mortgage Related Securities Pass-throughs n Mortgage-backed bonds n Collateralized mortgage obligations (CMO’s) and Remics n

COMMERCIAL MORTGAGE BACKED SECURTIES (CMBS) n Started with S&L crisis of 1980 s when COMMERCIAL MORTGAGE BACKED SECURTIES (CMBS) n Started with S&L crisis of 1980 s when RTC packaged commercial loans of failed thrifts and sold CMBSs n Senior tranche received all principal payments including prepayments n Subordinated tranche bore all losses from defaults

CMBS (cont. ) n Securitization process is same as for CMOs with different tranches CMBS (cont. ) n Securitization process is same as for CMOs with different tranches n 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 n Loans are credit rated and contributed to a REMIC

Secondary Mortgage Market 10 -4 n FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE) Established in Secondary Mortgage Market 10 -4 n FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE) Established in 1938 to buy FHA loans n Re-chartered in 1954 and became a private corporation n As of 1970, allowed to buy FHA, VA, and conventional mortgages n

10 -5 Secondary Mortgage Market n GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE) Created in 10 -5 Secondary Mortgage Market n GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE) Created in 1968 within HUD n Does not purchase mortgages or issue securities n Market focus is to guarantee FHA and VA pass-through securities n

10 -6 Secondary Mortgage Market n FEDERAL HOME LOAN MORTGAGE CORPORATION (FREDDIE MAC) Established 10 -6 Secondary Mortgage Market n FEDERAL HOME LOAN MORTGAGE CORPORATION (FREDDIE MAC) Established in 1970 to create a secondary mortgage market for conventional mortgages n Operates as a private corporation n Currently buys FHA, VA, and conventional mortgages n

Secondary Mortgage Market n Freddie Mac purchases both newly issued and seasoned (those with Secondary Mortgage Market n Freddie Mac purchases both newly issued and seasoned (those with some expired term) mortgages n 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 Market n Freddie Mac issues a wide variety of securities: Discount Notes Secondary Mortgage Market n Freddie Mac issues a wide variety of securities: Discount Notes and Debentures n Mortgage Participation Certificates (Passthroughs) on FRMs, ARMs, and multifamily n Collateralized Mortgage Obligations in several classes or tranches n Guaranteed Mortgage Certificates – not sold since 1979 n

Secondary Mortgage Market n Federal credit agencies that support the primary and secondary mortgage Secondary Mortgage Market n 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 n Federal Agricultural Mortgage Corporation (Farmer Mac) to underwrite pools of farm mortgages through pass-throughs n

Secondary Mortgage Market n Federal credit agencies that support the primary and secondary mortgage Secondary Mortgage Market n 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 n Financing Corporation formed in 1987 to recapitalize the FSLIC n

Regulation of Government. Sponsored Enterprises n GSEs are not officially part of the federal Regulation of Government. Sponsored Enterprises n GSEs are not officially part of the federal government n They appear to enjoy the backing of the federal government n 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 Enterprises n GSEs operate similarly to thrifts in purchasing long-term Regulation of Government. Sponsored Enterprises n GSEs operate similarly to thrifts in purchasing long-term mortgages n They face interest rate risk, default risk, and management/operating risk n Office of Federal Housing Enterprise and Oversight (OFHEO) oversees the operations of the GSEs