CALIFORNIA REAL ESTATE: CHAPTER 3: THE PRIMARY AND SECONDARY MARKETS. TERMS AND QUIZ.

Secondary Market Entity

A government-created entity that buys loans and issues and/or guarantees mortgage-backed securities: Fannie Mae, Ginnie Mae, or Freddie Mac

a. a loan that's going to be sold to one of the secondary market entities must comply with that entity's underwriting guidelines (not just the lender's own guidelines)

A lender cannot sell a mortgage loan to Fannie Mae unless: a. it followed the entity's underwriting guidelines b. it is a federally certified primary market entity c. it is a federally insured savings and loan association d. the loan is either FHA-insured or VA-guaranteed

d. a mortgage lender with more loan applicants than funds could raise the money to make more loans by selling some of its existing loans to a secondary market entity

A lending institution with more mortgage loan applicants than available loan funds would be likely to: a. buy mortgage-backed securities from another lender b. buy mortgage-backed securities from a secondary market entity c. buy mortgages from a secondary market entity d. sell mortgages to a secondary market entity

a. mortgage-backed security is a type of investment instrument

A mortgage-backed security is a type of: a. mortgage loan b. corporate debt certificate c. investment instrument d. guaranty

c. MBS investors usually receive monthly payments of principal and interest from the entity that issued the securities

An investor's return on mortgage-backed securities usually takes the form of: a. monthly servicing fees b. annual dividends from the mortgage pool c. monthly payments of principal and interest d. annual installment bonds

d. The government-sponsored enterprises are private corporations owned by their stockholders, but supervised by the Federal Housing Finance Agency, an independent agency.

As government-sponsored enterprises, Fannie Mae and Freddie Mac are: a. private corporations owned by stockholders b. government agencies financed with tax payer dollars c. regulated by the Federal Housing Finance Agency (FHFA) d. both a and b

Secondary Market Activities

Buying and Selling Loans Issuing Mortgage-Backed Securities Valuing Loans. The purchaser of a loan pays the lender the present value of the lender's right to receive payments from the borrower over the life of the loan. The present value is determined by comparing the rate of return on the loan to the rate of return available on other investments.

FHFA

HERA created a new regulator for the two GSEs, the Federal Housing Finance Agency

HERA

Housing and Economic Recovery Act of 2008

c. mortgage-backed securities are usually guaranteed by the entity that issues them. under a 2008 conservatorship, MBSs issued by Fannie Mae and Freddie Mac are also guarenteed by the federal government

Investors prefer to buy mortgage-backed securities instead of mortgages because the securities are: a. less liquid, and therefore safer b. serviced by the federal government c. guaranteed d. none of the above

b. nowadays, mortgage lenders tend to sell most of their loans on the secondary market

Most residential mortgage loans are: a. kept in portfolio b. sold on the secondary market c. sold on the primary market d. none of the above

The Two Mortgage Markets

Primary Market: where lenders make loans to home buyers. Secondary Market: where lenders sell loans to investors.

Loan Orinination

Processing Application Approval Decision Funding the Loan

Effects of the Secondary Market

Secondary Market Functions: promotes homeownership and investments provides funds stabilizes primary markets The secondary market gave primary market lenders a way to address an imbalance in a community's supply of and demand for mortgage funds. This moderated the adverse effects of local real estate cycles and provided a measure of stability in local markets

b. loan origination refers to processing the loan application, making the decision to approve the loan, and funding the loan

Taking a home buyer's loan application is a step in the: a. loan servicing process b. loan origination process c. loan guaranty process d. MBS process

b. loan transactions take place in the primary market

The Cantors just borrowed money from Seacliff Savings to finance the purchase of a home. This transaction took place in the: a. subprimary market b. primary market c. secondary market d. none of the above

b. moderating the negative effects of local real estate cycles and stabilizing the primary market were among the government's goals in creating Fannie Mae, Ginnie Mae, and Freddie Mac

The federal government created the secondary market entities in order to: a. originate residential mortgage loans nationwide b. help moderate the adverse effects of real estate cycles c. bring inflation under control at the local level d. stimulate diintermediation

HUD

U.S. Department of Housing and Urban Development

Disintermediation

When depository institutions lose funds to higher-yielding investments. Disintermediation can reduce the supply of funds that local financial institutions have available for mortgage lending

Law of Supply and Demand

a basic rule of economics which holds that prices (or interest rates) tend to rise when supply decreases or demand increases, and tend to fall when the supply increases or demand decreases

MBS Guaranty

a guaranty offered by an issuer of mortgage-backed securities, which provides that the MBS investors will receive the expected payments of principal and interest from the issuer, even if borrowers fail to make their payments on some of the pooled mortgage loans.

Government-Sponsored Enterprise (GSE)

an entity that is privately owned but created, chartered and supervised by the government. A GSE functions as a private corporation but must fulfill special legal responsibilities imposed by the government. The GSEs discussed in this chapter are Fannie Mae and Freddie Mac.

Mortgage-Backed Securities (MBS)

an investment instrument that has a pool of mortgage loans as collateral; usually issued by one of the secondary market entities

Availability of Funds in Primary Market

funds depends a great extent on secondary market. first mortgage funds are given to home buyer then sold in secondary market then pool to create MBS then sold to investors.

GSE

government sponsored enterprises

Prime Loans

loans made to borrowers with the highest credit rating (an A rating)

GSE and Subprime Loands

loans made to less creditworthy buyers

Subprime Loans

loans made to less creditworthy buyers.

Loan Origination

processing a loan application, deciding whether to approve or reject the application, and funding the loan

Loan Servicing

processing loan payments, keeping payment records, and handling collection problems and defaults. The entity that services a loan is not necessarily the lender that originated it

Secondary Mortgage Market

the financial arena in which investors buy mortgage loans from lenders throughout the country

Primary Mortgage Market

the financial arena in which mortgage loans are originated, where lenders make loans to homes buyers

Real Estate Cycles

ups and downs in the level of activity in a local real estate market, where a boom may be followed by a slump, or vice versa

Securitizing

when a secondary market entity creates mortgage-backed securities by buying a large number of mortgage loans, "pooling" them together, and pledging the pool as collateral for the securities.

Disintermediation

when depositors withdraw their savings from financial institutions and put the money into other types of investments that have higher yields