The National Mortgage Market

1. The National Mortgage Market Matt Hamlin

2. Overview • History • GSA • Fannie Mae • Ginnie Mae • Freddie Mac

3. History • Home owners bought property through the simple means of cash on hand. • Able families that qualified for a home loan were able to borrow money for 5 years—at end of five year period, balloon payment was due including all interest and principal. • Great Depression—25 percent of Americans lost their jobs and housing activity dropped by 80 percent. The stock market crash increased difficulty for home buyers by destroying savings accounts. • In contrast, today nearly 68 percent of Americans can afford a home which demonstrates a vast difference as compared to the Americans 70 years ago. • The earlier market was more vulnerable to real estate swings due to the inexistence of a national mortgage market.

4. 1930’s • The collapse of the housing industry in the United States during the 1930’s didn’t go unnoticed by the federal government. • Watching the disintegration of homeownership, the government designed programs aimed at expanding Americans’ credit and liquidity for commercial banks through new programs such as the Federal Home Loan Bank (FHLB) and the Federal Housing Administration (FHA). • Through FHA, the government created insurance against mortgage defaults. The FHA was also able to standardize mortgage terms by creating underwriting standards for the mortgage applicant. • In 1938 the government created a new agency called the Federal National Mortgage Association (FNMA) or Fannie Mae.

5. Government Sponsored Agencies • GSA is a quasi-corporate company generating profits for stock holders while enjoying the tax benefits such as tax exemption as well as implied government backing. • Fannie Mae began operation as a Government Sponsored Agency (GSA) • Lyndon B. Johnson in 1968 privatized Fannie Mae in order to remove it from the government’s budget. • Mortgages that meet the underwriting standards of the agencies are called conforming mortgages.

6. Fannie Mae • Fannie Mae’s primary purpose is facilitating liquidity for lenders via mortgages. • Before the 1970’s Fannie Mae accepted only FHA and Veterans Administration (VA) mortgages. • In 1970, congress allowed (current) Fannie Mae to purchase conventional mortgage loans and FHA and VA loans but Fannie Mae would not be backed by the U.S. government. • Congress provided financial backing by giving Fannie Mae a credit line with the Treasury.

7. Ginnie Mae • Ginnie Mae was created in 1968 to aid Fannie Mae with producing a more liquid secondary mortgage market. • A key feature of Ginnie Mae is that its pass-through securities have the guarantee of payment backed by the U.S. government where Freddie Mac and Fannie Mae are considered “corporate instrumentalities of government.” • Ginnie Mae does not buy or sell loans or issue mortgage-backed securities (MBS); rather it approves the pass-through securities that lenders issue. • The fee for approving such MBS is called the guaranteeing fee and this approval is how Ginnie Mae aids the cash liquidity in the secondary market • Ginnie Mae represents the largest portion of Pass-Through Securities outstanding.

8. Freddie Mac • Freddie Mac continues to keep money flowing to mortgage lenders to maintain the support of homeownership in the same manner as Fannie Mae. • Freddie Mac plays an important role in secondary mortgage market in that it is the second largest agency of pass-through securities. • Freddie Mac provides support for FHA/VA insured mortgages and conventional mortgages

9. Mortgage Market StructureExample:

10. Questions?