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Creating the secondary mortgage market: history and players

Creating the secondary mortgage market: history and players. Qingxing Rao. Agenda. History and basic information of secondary mortgage market. 5 players concerned The process of creating the secondary mortgage. Start of the secondary mortgage.

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Creating the secondary mortgage market: history and players

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  1. Creating the secondary mortgage market: history and players Qingxing Rao

  2. Agenda • History and basic information of secondary mortgage market • 5 players concerned • The process of creating the secondary mortgage

  3. Start of the secondary mortgage • Franklin Roosevelt signed The National Housing Act of 1934 • Federal Housing Administration was set up to provide guarantee to banks and saving institutions in case of loan default • Result:

  4. Fannie Mae was created in 1938 • purpose: free up capital and ensure liquidity in mortgage market. • Bought mortgages from banks either keep in own portfolio or sell to investors • Issued the first mortgage-backed security(MBS) in 1968

  5. Ginnie Mae • Was set up in 1968 by government • Purpose: ensure Federal Housing Administration (FHA) loans and Veterans Administration (VA) loans, as well as other special government lending programs

  6. Freddie Mac • Set up in 1970 • Purpose: offset Fannie Mae’s monopoly • Issued first Participation Certificate (PC) in 1971

  7. Similarities among three organizations • All of them are government sponsored enterprises (GSEs) • Functions: Support the liquidity and stability of secondary market

  8. Differences • Ginnie Mae • Government institution • Guarantee the secondary mortgage • Payment to investors is supported by government: means payment is ensured • Fannie Mae and Freddie Mac • Independent entities • Guarantee and issue the secondary mortgage • Payment to investors is not ensured • Both are taken over by government in 2008

  9. 4.5 trillion are secondary mortgage-backed security About 34% of total grade bond market

  10. Questions for you • What is the function of Freddie Mac? • A. offset Fannie Mae’s monopoly • B. free up capital • C. ensure liquidity in the secondary market • D. B & C • Which of following is/are under control of government? • A. Fannie Mae • B. Freddie Mac • C. Ginnie Mae • D. All of above

  11. Which one of the following is right? • Security issued by Fannie Mae is called Participation Certificate • Security issued by Ginnie Mae is called participation certificate • Security issued by Freddie Mac is called participation certificate • All above are right • Fannie Mae is set up in ___? • 1934 • 1938 • 1968 • 1970

  12. The process of creating the secondary mortgage 5 players concerned in creating the secondary mortgage 1.Borrowers 2.Banks 3.conduits: Fannie Mae, Freddie Mac 4.Government 5.the secondary mortgage market

  13. 1st step: fill out the loan application with financial information and pay application fee • 2nd step: bank will evaluate the credit of borrower. • Payment-to-income ratio (PTI): measures the ability of monthly payment. Lower PTI ratio  easier to afford monthly payment. • Loan-to-value ratio (LTV): measures the amount of the loan to the market value of the property. Lower LTV ratio  greater protection for lender • 3rd step: borrower signs the commitment letter, pay commitment fee, and wait for 30-60 days to get loan • Commitment letter obligates the lender to perform • Borrower has the right to get money from this bank or not

  14. What happens in this 30-60 days? • 4th step: bank sells the mortgage to, say, Fannie Mae • 5th step: Fannie Mae pools mortgages and creates mortgage-backed security • Agency pass-through security • Agency collateralized mortgage obligation • Agency stripped mortgage-backed security • 6th step: Fannie Mae sell the security to investors in the secondary mortgage market and the fund collected by Fannie Mae are transferred to borrowers through banks (borrower gets the loan) • 7th step: borrower pay monthly payment to bank, the payment then transferred to investor through banks

  15. Which player I missed? • Borrower • Bank • Government • Conduits • Market

  16. What is the function of the government? • Guarantee the payment for Ginnie Mae Investors can get payment from government when borrowers default monthly payment • Lent money to Fannie Mae and Freddie Mac

  17. Conclusion • Development of the secondary mortgage market • Fannie Mae, Ginnie Mae, and Freddie Mac • Similarity and difference among these three companies • How big the secondary mortgage market is • 5 players • The seven steps to create a secondary mortgage

  18. Reference • http://www.themonticellogroup.com/American_Mortgage_Market.pdf • http://seekingalpha.com/article/150723-getting-a-handle-on-the-u-s-bond-market • http://www.sec.gov/Archives/edgar/data/310522/000095013308000795/w48295e10vk.htm • http://critical-thinker.net/?p=1380

  19. Questions?

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