Chapter 10 The Secondary Mortgage Market Chapter

Chapter 10 The Secondary Mortgage Market

Chapter 10 Learning Objectives 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 n

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

Secondary Mortgage Market Participants FANNIE MAE, GINNIE MAE, FREDDIE MAC n Securitization of mortgages n Mortgage Related Securities n – Pass-Throughs – Mortgage-Backed bonds – Collateralized Mortgage Obligations (CMO’s) and REMICS

COMMERCIAL MORTGAGE BACKED SECURTIES 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 n

CMBS (cont. ) 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 n

Secondary Mortgage Market n 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 Market n 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 Market n 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 Market 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. n

Secondary Mortgage Market n Freddie Mac issues a wide variety of securities: – Discount Notes and Debentures – Mortgage Participation Certificates (Passthroughs) on FRMs, ARMs, and multifamily – Collateralized Mortgage Obligations in several classes or tranches – Guaranteed Mortgage Certificates – not sold since 1979

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 – Federal Agricultural Mortgage Corporation (Farmer Mac) to underwrite pools of farm mortgages through pass-throughs

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 – Financing Corporation formed in 1987 to recapitalize the FSLIC

Government-Sponsored Enterprises n n n 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 shown that federal funds would be used to “bail” them out of financial stress

Government-Sponsored Enterprises 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 n