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Chapter 10

Chapter 10. The Secondary Mortgage Market. Chapter 10 Learning Objectives. Understand the workings of the secondary mortgage market

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Chapter 10

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  1. Chapter 10 The Secondary Mortgage Market

  2. Chapter 10Learning Objectives • Understand the workings of the secondary mortgage market • 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

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

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

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

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

  7. Secondary Mortgage Market • 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

  8. Secondary Mortgage Market • 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

  9. Secondary Mortgage Market • 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

  10. Secondary Mortgage Market • Freddie Mac purchases both newly issued and seasoned (those with some expired term) mortgages • Freddie Mac will also purchase construction/permanent loans that are FRMs, ARMs, or balloon/reset. These must be new dwellings and not rehabs.

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

  12. Secondary Mortgage Market • 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

  13. Secondary Mortgage Market • 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

  14. Government-Sponsored Enterprises • 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

  15. Government-Sponsored Enterprises • GSEs operate similarly to thrifts in purchasing long-term mortgages • They face interest rate risk, default risk, and management/operating risk • Office of Federal Housing Enterprise and Oversight (OFHEO) oversees the operations of the GSEs

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