1 / 24

CHAPTER NINETEEN

CHAPTER NINETEEN. THE SECONDARY MORTGAGE MARKET: PASS THROUGH SECURITIES. Chapter Objectives. Evaluation of secondary mortgage market and FNMA and GNMA Mortgage backed bonds and pass through securities Implications of borrower prepayment. Mortgage Markets. Primary mortgage market

tyrone
Download Presentation

CHAPTER NINETEEN

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER NINETEEN THE SECONDARY MORTGAGE MARKET: PASS THROUGH SECURITIES

  2. Chapter Objectives • Evaluation of secondary mortgage market and FNMA and GNMA • Mortgage backed bonds and pass through securities • Implications of borrower prepayment

  3. Mortgage Markets • Primary mortgage market • Lenders and borrowers • Secondary mortgage market • Conduits, investment bankers and investors • Mortgage-backed securities

  4. Real Estate Debt and Equity Markets

  5. Mortgage Markets • Primary mortgage market • Lenders and borrowers • Secondary mortgage market • Federal National Mortgage Assoc. “Fannie Mae” • Federal Home Loan Mortgage Corporation “Freddie Mac”

  6. Depository Lenders in the Primary Market • Commercial Banks • Savings Institutions

  7. Nondepository Lenders in the Primary Market • Mortgage bankers • Mortgage brokers • Others

  8. Government-Sponsored Mortgage Programs • FHA-Insured Loans • VA-Guaranteed Loans

  9. FHA- Insured Loans • FHA loans are made by private lenders through various programs (e.g. section203 loans) • FHA insurance protects the lender from losses due to default and foreclosure • FHA borrowers pay an up front premium, plus a monthly premium for FHA insurance • Maximum FHA loan amounts vary depending on an area’s median house price • Minimum down payment of three percent

  10. VA-Guaranteed Loans • VA loans are made by private lenders (available to U.S. Veterans) • VA guarantees the lender against loss up to 100% of a property’s value • VA charges a funding fee based on the size of the LTVR • Maximum VA loan amounts exist • No down payment is required and no discount points can be paid by the borrower

  11. The Secondary Market • Federal National MTG. Assoc., FNMA (Fannie Mac) • Federal Home Loan Mtg. Assoc., FHLMC (Freddie Mac) • Government National Mtg. Assoc., GNMA (Ginnie Mae) • Life insurance companies and other purchases

  12. Fannie Mae, FNMA • FNMA was organized in 1938 to purchase FHA loans • FNMA reorganized in 1968 and authorized to purchase conventional mtgs. in 1970 • FNMA obtains funds from the sale of its stock, its MBS, by issuing bonds, and from its earnings • The MBSs issued by FNMA and the mortgages they own account for 23 percent of the residential mortgage market

  13. Freddie Mac, FHLMC • FHLMC was created in 1970 to provide a secondary market for S&L associations • FHLMC currently buys both government- underwritten and conventional loans • Freddie Mac and Fannie Mae are now operationally similar • The MBSs issued by Freddie Mac and the mortgages they own represent 16 percent of the residential mortgage market

  14. Ginnie Mae, GNMA • GNMA was created in 1968 • GNMA guarantees the timely payment of principal and interest on MBSs (primarily FHA and VA pools) • GNMA also purchases mortgages designed by the FHA for low and moderate- income buyers

  15. GNMA Payment Guarantee • GNMA was empowered to guarantee timely payment of PI, on • Securities backed by FHA, VA, and FmHA • GNMA resulted in an expansion of secondary market • Pass-through securities • Default risk minimized

  16. Operation of Secondary Market • Direct sale programs • Mortgage-related security pools

  17. Direct Sale Programs • Originators • Mortgage companies • Thrifts • Commercial Banks • others • Buyers • Life insurance companies • Eastern thrifts • FNMA • FHLMC

  18. Mortgage Related Security Pools • MBBs • MPTs (pass through) • MPTBs (pay through) • CMOs

  19. Mortgage- Backed Bonds • Fixed coupon rate • Specific maturities • Issuer retains ownership of mortgages • Mortgages pledged as security • Over collateralization

  20. Mortgage- Backed Bonds Continued • Investment Rating • Quality • Diversification • Rates • Prepayment • Appraised value • DCR

  21. Pricing- Calculator Solution • n= semi annual periods • I= required rate • PV= present value of bond • pmt= semi annual interest payment (stated rate) • FV= par value • Requires 4 variables to solve for yield or PV • inverse relationships between interest rates and bond prices

  22. Mortgage Pass-Through Securities • Mortgage originations are pooled by lenders or FNMA or FHLMC • Originators use a securities underwriter • Securities represent an individual interest in pool • Large or small investors

  23. Characteristics of Mortgage Pools • Security issuers and guarantors • Pass through • Participation certificates • MBS • Default insurance • PMI- conventional • Guarantee- VA • Insured- FHA

  24. Characteristics of Mortgage Pools Continued • Payment patterns • Coupon rates and interest rates • Geographic distributions • Borrower characteristics • Pool size • Prepayment considerations • All of the above can effect pricing

More Related