Real Estate Finance Ch.2 The Secondary Market & The Federal Reserve System
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FREDDIE MAC)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GINNIE MAE)
REAL ESTATE INVESTMENT TRUSTS
(REITS)
What are the 2 main activities of the secondary market?
1) Buying loans and 2) Issuing mortgage backed securities.
The economy in the United States is allowed to grow within certain guidelines by supply and demand, and if the growth rate exceeds these limits, the FED steps in to slow things down by:
1) Changing the reserve requirements and/or 2) Changing the discount rate. Each member banks sets aside a certain percentage of its deposits in a reserve account. The purpose is twofold: 1) To meet the demands of its depositors and 2) To control the amount of money available for loans.
The most important buyers in the secondary market are governmentsponsored agencies. These agencies include:
1) Federal National Mortgage Association: Referred to as "Fannie Mae" or FNMA. 2) Federal Home Loan Mortgage Corporation: "Freddie Mac" or FHLMC. 3) Government National Mortgage Association: "Ginnie Mae" or GNMA.
The two major purposes of the Federal Reserve System-
1. Supply reserve funds when needed and 2. Control bank and consumer credit.
The system is composed of __ Federal Reserve Districts, each with a ____________.
12, Federal Reserve Bank.
Each one is under a Board of Directors composed of __ members who represent business, the banking industry and the general public in their district
12.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC):
A federal agency that insures deposits in commercial banks up to $250,000 and, along with the Federal Reserve System, regulates banks and banking procedures.
REAL ESTATE OWNED (REO'S):
A term used by lending institutions that refers to ownership of real property acquired for investment or as a result of foreclosure.
Toxic asset
An MBS that has lost most or all of its value.
SECONDARY MARKET:
An informal market where existing mortgages are bought and sold. Do not confuse this term with "Secondary Mortgage".
FHLMC was created through the ___________.
Emergency Home Finance Act of 1970.
By 1948 the agency was buying loans on a large scale. That same year, Congress authorized FNMA to purchase _________.
FHA,VA-guaranteed loans.
FHLMC is authorized to deal in-
FHLMC is authorized to deal in FHA and VA loans from originators, pools them as backing for securities and then sells the securities to financial institutions and other investors who would traditionally buy bonds.
Who is the nation's largest investor in residential mortgages?
FNMA
Unlike other investments, real estate loans can not be bought and sold.
False
The Federal Reserve Banks are controlled by a government agency.
False, The Federal Reserve Banks are not controlled by any government agency.
As a part of _____________, it was originally formed as a wholly-owned government corporation and its specified purpose was to provide a secondary market for FHA-insured mortgages.
Franklin D. Roosevelt's "New Deal".
The current assets of these two companies combine for a total that is 45 percent greater than that of the nation's largest bank. Their combined debt is equal to 46 percent of the national debt as of the mid 2000's.
Frannie Mae, Freddie Mac.
____ started the first mortgage-backed securities program in 1970.
GNMA, its guaranteed securities are backed by pools of FHA and VA loans. Because the US government guarantees repayment to investors, these GNMAs enable mortgages made to ordinary households to compete with large corporations for financing in the bond market.
INVESTOR:
In mortgage lending, the holder of a mortgage, or a permanent lender for whom the mortgage banker services the loan.
What was Freddie Macs original purpose?
Its original purpose was to aid savings and loan associations which were hit hard by the recession of 1969-1970.
WAREHOUSE FEES:
Many mortgage firms borrow funds on a short term basis in order to originate loans, which will later be sold in the secondary mortgage market. When the rate of interest is higher on a short term loan than on a long term loan, the lender has an economic loss. Charging a warehouse fee offsets this loss. This fee is charged to the buyer at closing.
Do State Banks?
No, National banks must belong and any state banks that wish may join the Federal Reserve System.
Members are appointed by the _________ with the advice and consent of the Senate.
President of the U.S.
S&Ls
S&Ls made mostly conventional loans and before FHLMC there wasn't a dependable secondary market for conventional loans. As a result, S&Ls had kept almost all of their loans in a portfolio. By purchasing their conventional loans, FHLMC enabled S&Ls to acquire additional funds for lending.
SHORT SALE:
Sale of a property where the lender agrees to settle for less than the amount owed on the property.
What does a bank have to do to be part of the Reserve?
The bank must buy stock in the system and agree to abide by the rules of the Federal Reserve. It must also meet the reserve requirements established by the FED.
YIELD = PROFIT
The effective rate of return on an investment based upon the fees, the rate of interest and the price paid for the mortgage.
Discount Rate:
The rate the Federal Reserve charges its member bank to borrow money.
LOAN PORTFOLIO:
The total of all the loans that a financial institution or other lender holds at a given time. A list, distribution, or grouping of mortgage loans.
The Board of Governors
Their duties are: 1) Publish the Federal Reserve Bulletin 2) Set the interest rate member banks will pay when borrowing money from the FED (the discount rate). 3) Raise or lower reserve requirements of member banks.
The Federal Reserve has two primary methods of controlling the flow of money in the United States-
They control the flow of money by their availability to change the reserve requirements of the banks and/or changing the discount rate charged to banks.
A real estate loan is an investment like stocks and bonds.
True
A secondary market agency creates mortgage backed securities by buying a large number of mortgage loans, pooling them together, and pledging the pool as collateral for these mortgage-backed securities.
True
FHLMC is a private corporation and their programs must be approved by HUD.
True
FNMA was created in 1938, it was the first government-sponsored secondary market institution.
True
GNMA was created with the passage of the Housing and Urban Development Act in 1968.
True
In some cases, a lender sells mortgage loans directly to another lender in another part of the country.
True
Members of the board are chosen primarily by the Board of Governors of the Reserve District.
True
National banks must belong and any state banks that wish may join the Federal Reserve System.
True
More often, however, a lender sells mortgage loans to one of the secondary market agencies who in turn creates mortgage backed securities.
True, FNMA exchanges mortgage back securities for a block or pool of mortgages.
In 1968, due to fiscal pressures created by the _______, FNMA became a government chartered, shareholder owned, for profit corporation.
Vietnam War
Are stocks and bonds securities?
Yes
Do National Banks have to belong to the Reserve?
Yes
REIT-
a company that owns, and in most cases operates, income-producing real estate. Some REITs finance real estate.
In 1970, with the passage of the Emergency Home Finance Act, FNMA was allowed to purchase _________ as well as FHA and VA loans.
conventional loans
To be a REIT, a company must-
distribute at least 90 percent of its taxable income to shareholders annually in the forms of dividends.
It is a wholly-owned ________ corporation which replaced FNMA when it became privately owned.
government
The Board of Governors
has supervisory control over all of the Reserve Banks.
Conforming loans
loans that meet the loan purchase requirements of both Fannie Mae and Freddie Mac.
One of the primary responsibilities of FNMA is to-
maintain an active secondary money market for mortgages.
GNMA was given the responsibility of-
managing and eventually liquidating the remaining FNMA mortgages. Another of GNMA's functions is "special assistance".The agency assists the financing of the urban renewal and housing projects by offering below market interest rates to low income families.
The Federal Reserve drives the ____________.
mortgage loan interest rate.
FNMA continued to buy FHA and VA loans, but it began to use _______ rather than government funding.
private capital
The secondary market
refers to the selling and purchasing of closed real estate mortgage loans.
In order to qualify for the advantages of being a pass-through entity for U.S. corporate income tax, a REIT must:
• Be structured as a corporation, trust, or association • Be managed by a board of directors or trustees • Have transferable shares or transferable certificates of interest • Otherwise be taxable as a domestic corporation • Not be a financial institution or an insurance company • Be jointly owned by 100 persons or more • Have 95 percent of its income derived from dividends, interest, and property income • Pay dividends of at least 90% of the REIT's taxable income • Have no more than 50% of the shares held by five or fewer individuals during the last half of each taxable year (5/50 rule) • Have at least 75% of its total assets invested in real estate • Derive at least 75% of its gross income from rents or mortgage interest • Have no more than 20% of its assets invested in taxable RIETS subsidiaries.
