RFINANCE7: Secondary Mortgage Market

Investors can purchase fractional interests in these loan packages or:

"mortgage pools" through the services of local stockbrokers. -Discounts are used frequently in the secondary market

Similar to our earlier Fannie Mae discussion, Freddie Mac has guidelines to which lenders must conform. These guidelines include:

- Loan limits - Loan limits are linked to the Federal Housing Finance Board's October single-family price survey. These loan limits are adjusted each year in accordance with the results of this housing survey and apply to 1- to 4-unit residences. - PMI - Any loan made that has a loan-to-value ratio of more than 80 percent must carry private mortgage insurance. - Gifts - Funds from gifts may be used as all or part of the 20% down payment. - Seller down payment - If the borrower has a 5 percent down payment, a seller can contribute up to 3 percent of the closing costs. Seller contribution goes up to 6 percent if the down payment is 10 percent.

Check Your Understanding-Answers

- Why did the federal government establish Fannie Mae? The federal government established Fannie Mae to increase the flow of mortgage money by creating a secondary market to purchase Federal Housing Administration (FHA)-insured mortgages. -What important action took place with the 1968 Charter Act? Under the 1968 Charter Act, Fannie Mae became a fully private company operating with private capital on a self-sustaining basis. Its role was expanded to buy mortgages beyond traditional government loan limits. -What automated underwriting systems does Fannie Mae have available for users and for whom are they designed? Desktop Underwriter (DU) ® is designed for lenders. Desktop Originator (DO) ® is designed for brokers and correspondents. - Name and explain two of Fannie Mae's special programs. (See screen 14 for other correct answers.) Neighborhood Champions mortgages make home buying easier for teachers, police officers, firefighters, nurses, hospital workers and other community service professionals. America's Living Communities Plan supports communities' visions for neighborhood revitalization and development.

Check Your Understanding-Answers:::

- Why was Freddie Mac created and what is its mission? Freddie Mac was created in 1971 to develop a mortgage-backed security for conventional loans. Freddie Mac's mission is to provide stability, affordability and opportunity to the housing market by putting home ownership within reach for minority populations and making rental housing more affordable. - Name three Freddie Mac fixed rate programs and name one feature of each. (See screens 21 and 22 for other correct answers.) Streamlined Purchase - Offering 400 - Borrowers pay a nominal fee or higher interest rates for a loan with less documentation and faster processing. Affordable Merit Rate Mortgages - Borrower can use alternative sources of funds not permitted for other mortgages Freddie Mac purchases. Alt 97 Mortgage - Designed for borrowers with weak credit reputations or past credit challenges. - What do Home Possible mortgages do? Home Possible Mortgages offer flexible underwriting, low-to-no down payments, expanded loan-to-value (LTV) ratios and other special underwriting features to underserved qualified borrowers. - Explain Don't Borrow Trouble. Don't Borrow Trouble is an anti-predatory lending campaign, combining extensive public education with comprehensive counseling services. This program is designed to help homeowners avoid scams and resolve any financial difficulties they may be experiencing.

Fannie Mae"

-Fannie Mae is a shareholder-owned company that works to make sure mortgage money is available for people across the country. -Fannie Mae does not lend money directly to home buyers. They work with lenders to make sure the lenders don't run out of mortgage funds. - Fannie Mae stock (FNM) is actively traded on the New York Stock Exchange and other exchanges and is part of the Standard & Poor's 500 Composite Stock Price Index. -Fannie Mae operates under a congressional charter directing them to channel their efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans. Fannie Mae receives no government funding or backing.

To provide Americans with more affordable home financing opportunities, Fannie Mae has developed a variety of mortgage products.

1) Adjustable Rate Interest rates fixed for 1, 3, 5, 7 or 10 years before becoming adjustable. Interest rate caps for adjustment periods and life of the loan. Convertible loans (adjustable to fixed rate) available. 2) Balloon Fixed rate loan with a term of seven years. Amortized over 30 years. At end of year seven, pay off in lump sum or refinance. 3) Fixed Rate Choose from these programs: 15 Year - Offers a lower interest rate. Builds up equity faster. 20 Year - Pay less interest over the life of the loan, compared to a 30-year mortgage. 30 Year - Most popular mortgage. Usually requires a down payment of only 3 to 5 percent. 40 Year - Lower mortgage payment because of longer amortization period. Easier to qualify for. Biweekly Mortgage - Mortgage payments every 14 days. Takes about 22 years to pay off a 30-year mortgage. Expanded Approval® with Timely Payment Rewards® (EA/TPR®) - Designed for borrowers with less than perfect credit. Interest-Only Mortgage - Lower payments for the first few years of the mortgage term. MyCommunityMortgageTM - A flexible mortgage product for low- and moderate-income borrowers. Native American Housing Loans - Supports lending on fee-simple, federally restricted trust lands, and tribally restricted fee simple lands. Pledged-Asset Mortgage - Allows the buyer to borrow up to 100 percent of the sales price (or appraised value, if less) of a home when there is a pledge of a stable financial asset. Rural Housing Loans - Includes additional flexibilities for rural communities: Higher income limits in rural areas New rural appraisal guidelines Simultaneous Seconds Mortgage - Originates and closes a second loan in conjunction with the first mortgage.

Fannie Mae has two automated underwriting systems available for users:

1) Desktop Underwriter (DU) ® - formed credit decisions on conventional conforming, non-conforming and government loans. It allows mortgage loan applications to be processed in 15 minutes or less. 2) Desktop Originator (DO) ® helps brokers and correspondents generate more loans, gain a competitive edge in the marketplace, boost profitability, and enhance customer service and satisfaction.

Freddie Mac is taking positive steps to weed out these predatory lenders.

1) Don't Borrow Trouble is an anti-predatory lending campaign, combining extensive public education with comprehensive counseling services. This program is designed to help homeowners avoid scams and resolve any financial difficulties they may be experiencing. It is the most comprehensive and successful consumer awareness/foreclosure prevention campaign in America. Don't Borrow Trouble uses brochures, mailings, posters, public service announcements, transit ads and television commercials to inform the public and answer questions from potential borrowers. The program also provides assistance to persons who have already taken out a loan. Since 2000, Freddie Mac has expanded the program by providing the following tools: Seed funding Bilingual media toolkit Project coordination Marketing consultant services Onsite training The mayor or another public official in any community can start a Don't Borrow Trouble campaign in his or her community simply by requesting a toolkit directly from Freddie Mac. Borrowers can learn about the pitfalls of borrowing and what to avoid by visiting the Don't Borrow Trouble website.

Many communities in our nation face trust, language and cultural barriers that can prevent community members from seeking to own a home. To help remove these barriers and expand home ownership opportunities nationwide, Freddie Mac has collaborated with other organizations to develop initiatives and tools that can help lenders and community-based organizations reach consumers in their daily environments.

1) Get the Facts! Get the Facts! was developed to help dismiss common myths about buying and owning a home in America. This workshop, which is available in English or Spanish, is designed to break down the barriers that often keep people from exploring the possibility of home ownership. Community-based organizations can present this one-hour workshop as a preface to homebuyer education. 2) CreditSmart® and CreditSmart Español CreditSmart is a credit and financial education program, which is offered in English and Spanish. This program gives insight into how lenders assess credit histories, educates consumers about long-term credit and money management, and explains the role of credit in purchasing and maintaining a home. Community-based organizations usually teach this program as part of a credit or home ownership workshop. 3) The e-Bus This self-contained traveling mortgage information center comes complete with computer workstations and Internet connectivity. On the e-bus, consumers talk with mortgage experts to get a tailored evaluation of their finances and qualifications for a mortgage. They can also get help filling out a mortgage application. This service is particularly valuable to low- and moderate-income consumers. 4) Spanish Language Mortgage Documents In an effort to better serve the needs of the rapidly-growing Hispanic community, Freddie Mac and Fannie Mae jointly offer 83 non-executable Spanish translations of Freddie Mac/Fannie Mae documents. Translations are provided for 54 security instruments, 20 promissory notes, and 9 related documents and are available for all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands. These translations are free and downloadable.

Important players in the secondary mortgage market are:

1) Ginnie Mae - Government National Mortgage Association (GNMA) - a government agency 2) Fannie Mae - Federal National Mortgage Association (FNMA) - a former government agency that became a private corporation in 1968 3) Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMC) - a quasi-government agency These agencies, collectively known as government-sponsored enterprises (GSE), purchase loans or guarantee mortgage-backed securities issued by lenders.

Ginnie Mae has two types of mortgage-backed securities (MBS) programs.

1) Ginnie Mae I MBS (Mortgage-Backed Securities) are based on single-family pools and are Ginnie Mae's most heavily-traded MBS product. The underlying mortgages generally have the same or similar maturities and the same interest rate on the mortgages. Ginnie Mae I payments are made to holders on the 15th day of each month. The minimum pool size is $1 million (but may be $25,000 if issued in connection with a local or state housing bond financing program). A pool must consist of mortgages within one of these categories. Single-family level payment mortgages Single-family buydown mortgages Single-family graduated payment mortgages Single-family growing equity mortgages Manufactured home loans Project construction loans, including multifamily residential, hospital, nursing home, and group practice facility loans Project (permanent) loans, including multifamily residential, hospital, nursing home, and group practice facility loans 2) Ginnie Mae II MBS (Mortgage-Backed Securities) are modified pass-through mortgage-backed securities. An issuer may participate in the Ginnie Mae II MBS either by issuing custom, single-issuer pools or through participation in the issuance of multiple-issuer pools. A custom pool has a single issuer that originates and administers the entire pool. A multiple-issuer pool typically combines loans with similar characteristics. Loans with different interest rates may be included in the same pool or loan package, except in the manufactured home loan program where a different rule is applicable. The Ginnie Mae II MBS have a central paying and transfer agent that collects payments from all issuers and makes one consolidated payment, on the 20th of each month, to each security holder. Any one pool must consist of only one of the following mortgage types: Single-family level payment mortgages (FHA, VA, or Rural Housing Service loans) Single-family graduated payment mortgages (FHA or VA) Single-family growing equity mortgages (FHA or VA) Manufactured home loans (FHA or VA) Single-family adjustable rate mortgages (FHA or VA). The minimum pool size is $1 million for single-family pools, $350,000 for manufactured home pools, and $500,000 for all other pool types.

Mortgage funds can be shifted to where they are most needed in a variety of ways:

1) Lenders can sell loans to one another. For example, a California savings and loan association has a higher demand for loans than it can meet. A savings and loan association in Illinois has a surplus of deposits and a low loan demand. If the California savings bank sells loans to the Illinois savings bank, the California bank would get the money it needs to make new loans, while the Illinois bank gets to invest its surplus funds. 2) One institution can sell a part interest in a block of loans to another institution. This is called participation. Using our example from above, California has $5,000,000 in loans to sell to Illinois. Instead of selling the entire block, California could sell 90 percent interest, $4,500,000, and retain the other 10 percent. In this situation, California would still service the loans and then pass 90 percent of the mortgage payments to the Illinois bank. 3) A more common way of shifting funds is through the use of mortgage-backed securities (MBS), which are backed by a pool of mortgages. Governmental, quasi-governmental, or private entities purchase mortgage loans from banks, mortgage companies, and other originators and then assemble them into pools. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.

Any lender wanting to sell loans to Fannie Mae must conform to their guidelines. Some of the guidelines include the following:

1) Loan limits - Fannie Mae sets loan limits with are linked to the Federal Housing Finance Board's October single-family price survey. These loan limits are adjusted each year in accordance with the results of this housing survey. 2) Debt-to-income ratio - A borrower's monthly debt payments cannot exceed 28 percent of the monthly income. 3) PMI - Any loan made that has a loan-to-value ratio of more than 80 percent must carry private mortgage insurance. 4) Gifts - Funds from gifts may be used as all or part of the 20% down payment. 5) Seller down payment - If the borrower has a 5 percent down payment, a seller can contribute up to 3 percent of the closing costs. Seller contribution goes up to 6 percent if the down payment is 10 percent.

There are three types of mortgage-backed securities:

1) Straight pass through - The security holder receives the actual principal and interest payments as they are received from the mortgages in the pool. 2) Modified pass-through - The security holder receives the interest portion of the payment, whether or not it has been collected, and the principal payment when it is collected. 3) Fully modified pass-through - The security holder receives payment of both principal and interest, whether or not is has been collected.

Borrowers who fall into the "below A" categories are referred to as sub-prime borrowers.

Although there is a secondary market for these less than "A" paper loans, they are often kept in portfolio by the originating lenders. Some lenders today might insist on a "B" type loan to start with but agree to review the case in one or two years. If the borrower has a solid track record of regular payments and no further credit issues have arisen, the lender might upgrade the loan to an "A" position and lower the interest rate. It is more beneficial for the lender to keep this now qualified borrower on the books rather than to have that person refinance with another lender.

A predatory lender is one that literally "preys" on the customers who may fall into the "B," "C" or "D" lending categories, particularly those who do not speak English, are poorly educated or are elderly.

Another area of predatory lending is in home equity loans. An example of this would be an unscrupulous lender who convinces an elderly widow to place a home equity loan on her property in order to obtain cash, even though the lender is fully aware that she will never be able to repay the loan. At some point, the lender forecloses and the widow loses her home and all of her earlier investment in the home.

No/Low Down Payment:

Choose from these programs: Expanded Approval® with Timely Payment Rewards® (EA/TPR®) - Designed for borrowers with less than perfect credit. Flexible 100TM - Allows both fixed and ARM loans, uses the automated underwriting program and is not restricted based on the borrower's income. Flexible 97®- Allows both fixed and ARM loans, uses the automated underwriting program and is not restricted based on the borrower's income. MyCommunityMortgageTM - A flexible mortgage product for low- and moderate-income borrowers. Pledged-Asset Mortgage - Allows the buyer to borrow up to 100 percent of the sales price (or appraised value, if less) of a home when there is a pledge of a stable financial asset.

Reverse Mortgages for Seniors:

Choose from these programs: HUD's Home Equity Conversion Mortgage (HECM) - An FHA reverse mortgage. Home Keeper ® - Reverse mortgage for those 62 and over based on the home's equity. Three payment plans available. Home Keeper for Home Purchase - No borrower income limits and no credit requirements mean the borrower may qualify for a higher-priced home. Loan qualification is based on the borrower's age and the value of the home the buyer wants to purchase.

Home Construction & Renovation Loans:

Choose from these programs: - HomeStyle® Renovation Mortgage - Allows a fixed-rate mortgage with a term of 15 or 30 years, or a 30-year adjustable rate mortgage (ARM) that has annual rate adjustments after the 3rd, 5th, or 7th year, and the purchaser can combine home purchase or refinance with home improvements.

As part of the underwriting process, the system does an assessment of the borrower's credit risk. This:

FICO score, named for Fair Isaac and Company who created the test, is the result of a scoring process that awards or deducts points based on certain items, such as: How timely the borrower makes payments on other loans, credit cards, etc. (35 percent of the score) How much the borrower currently owes (30 percent of score) How long the borrower has had credit (15 percent of score) The number of inquiries that have been made to the borrower's credit report (10 percent of score) What other types of credit the borrower currently has (10 percent of score) When the credit report prints out in the lender's office, the total score is displayed. The actual score can be anywhere from 300 to 900. Most people score in the 600s or 700s. Lower credit scores require a more thorough review than higher scores. Often, mortgage lenders will not even consider a score below 600. Lenders can also order a borrower's credit report from any of the three major credit reporting agencies: Equifax at www.equifax.com Experian at www.experian.com TransUnion at www.transunion.com Lenders today generally request a tri-merge credit report, containing credit information from all three of the credit bureaus. Different information is often provided on the three reports, and there are usually three different credit scores for the individual. The lender typically uses the middle score, not an average of the three.

In 2004, the Bank of America and Fannie Mae teamed up to make home buying easier for teachers, police officers, firefighters, nurses, hospital workers and other community service professionals.

Fannie Mae committed to buy all Neighborhood Champions mortgages originated by the Bank of America. Neighborhood Champions mortgages broaden standard underwriting rules on credit, income, assets, and down payments. Features include: Highly flexible credit standards allow applicants with little or no credit history, or below-par credit scores because of "thin" credit files, to be underwritten on the basis of 12 monthly rent payments plus telephone, cable TV or utilities payments. Qualifying income can include undocumented cash from sideline employment or moonlighting. Down payments on a $333,700 maximum mortgage can go as low as zero, with just $500 necessary from the applicant for part of the closing costs. The program allows financial gifts from relatives, friends or organizations. Applicants can purchase either one- or two-unit properties, condominiums and cooperatives in select areas. The loans carry a 30-year fixed-rate and "7-1" hybrid ARM terms.

American Dream Commitment is:

Fannie Mae's 10-year pledge to help six million families, including 1.8 million minority families, become first-time homeowners. The program is dedicated to helping lenders lower costs and increase the opportunities for home ownership and affordable rental housing options for low- to moderate-income individuals and families. Its goals include: Expanding access to home ownership for first-time home buyers and help raise the minority home ownership rate Making home ownership and rental housing more available for families at risk of losing their homes. Expanding the supply of affordable housing where it is needed most, which includes initiatives for workforce housing and supportive housing for the chronically homeless.

Farmer Mac has two programs:

Farmer Mac I - Farmer Mac purchases or commits to purchase eligible loans. To be eligible for the Farmer Mac I program, loans must meet Farmer Mac's underwriting, appraisal, documentation and other specified standards. Farmer Mac II - Farmer Mac purchases the "guaranteed" portions of loans guaranteed by the United States Department of Agriculture.

Summary/Review:::::

Farmer Mac, the Federal Agricultural Mortgage Corporation (FAMC), was established as a secondary mortgage market for farmers, ranchers and rural homeowners. Farmer Mac deals with agricultural loans in the same way that Fannie Mae and Freddie Mac deal with conventional and government loans. Farmer Mac has two programs: Farmer Mac I - Farmer Mac purchases or commits to purchase eligible loans. Farmer Mac II - Farmer Mac purchases the "guaranteed" portions of loans guaranteed by the United States Department of Agriculture. The Tax Reform Act of 1986 created a special tax vehicle called a real estate mortgage investment conduit (REMIC) for entities that issue multiple classes in investor interest that are backed by mortgage pools. A REMIC is an investment-grade mortgage bond that separates mortgage pools into different maturity and risk classes. A REMIC is a conduit for tax purposes, meaning that the income of the REMIC is passed through to the investors who report the income on their individual tax returns. A REMIC can issue mortgage securities in a wide variety of forms. Fannie Mae and Freddie Mac are among the major issuers of REMICs.

Summary/Review:::

Freddie Mac has a variety of fixed-rate mortgage products that include the following: 15-, 20-, 30- and 40-year terms Freddie Mac 100 Streamlined Purchase - Offering 400 Streamlined Purchase - Offering 401 Affordable Merit Rate Mortgages Alt 97 Mortgage Guaranteed (Section 502) Rural Housing (GRH) Mortgages HUD - Guaranteed Section 184 Native American Mortgages Freddie Mac has several other mortgage products, including adjustable and balloon mortgages, mortgages designed for borrowers with less-than-perfect credit and a group of products called Home Possible Mortgages, which offer flexible underwriting, low-to-no down payments, expanded loan-to-value (LTV) ratios and other special underwriting features to underserved qualified borrowers. Freddie Mac presents a wide range of options to fund the acquisition, refinance, moderate rehabilitation, and new construction of multifamily properties that offer affordable rents to families with low- and very low-incomes through programs such as: Forward Commitment, Bond Credit Enhancement, Low-Income Housing Tax Credit Investments, and LIHTC Tax Credit Moderate Rehabilitation. Freddie Mac has been instrumental in developing initiatives and tools for consumers. A particularly important program is called Don't Borrow Trouble. Don't Borrow Trouble is an anti-predatory lending campaign designed to help homeowners avoid scams and resolve any financial difficulties they may be experiencing. Don't Borrow Trouble uses brochures, mailings, posters, public service announcements, transit ads and television commercials to inform the public and answer questions from potential borrowers.

Adjustable-Rate Mortgages (ARMs):

Freddie Mac has a wide array of ARM products to choose from. As you know, ARMs have a set interest rate for a specified period of time and then the rate is adjusted. For example, with a one-year ARM there is a first interest change date approximately 12 months from the first payment date and an interest change date every 12 months thereafter. Freddie Mac offers 6-month, 1-year, 3-year and 5-year ARMs. Another variety of ARM allows the first interest change date to be delayed for a number of years and then has subsequent interest rate changes every year. Freddie Mac offers these products in this category: 3/1 ARM, 5/1 ARM, 7/1 ARM and 10/1 ARM. Still another group of ARM products allows the first interest change date to be delayed for a number of years and then has subsequent interest rate changes every six months. Freddie Mac offers these products: 3/6-month ARM, 5/6-month ARM, 7/6-month ARM and 10/6-month ARM.

Fixed Rate Mortgages:

Freddie Mac offers fixed-rate mortgages for terms of 15, 20, 30 and 40 years. Borrowers can get these loans to purchase or refinance a 1-4 family residence, a single-family first or second home or investment property. Other fixed-rate mortgage products include the following: 1) Freddie Mac 100 Allows 97 to 100 percent loan-to-value ratio on single-family primary residence. Borrower can get loan for purchase or refinance. Requires 35 percent mortgage insurance. Requires 3 percent or $500 in closing costs from borrower's own funds. Requires two months of reserves. 2) Streamlined Purchase - Offering 400 Borrowers pay a nominal fee or higher interest rates for a loan with less documentation and faster processing. Borrowers must have excellent credit - a score of 740 or better. Requires disclosure but not verification of employment. 3) Streamlined Purchase - Offering 401 Borrowers get a loan with less documentation and faster processing without paying a fee. Borrowers must have a credit score of at least 680. Requires disclosure and verification of employment or submission of tax returns. Borrowers must have no more than a 50 percent debt-to-income ratio. 4) Affordable Merit Rate Mortgages Designed for borrowers with weak credit reputations or past credit challenges. Borrowers have a four-year period to make 24 consecutive on-time mortgage payments in order to qualify for a one-time, one percent interest rate reduction. Applies to 1- to 2-unit primary residences only, including condominiums, PUDs and manufactured homes. Designed for purchase only - no refinance. 5) Alt 97 Mortgage Allows for an LTV ratio between 90 and 97 percent. Borrower can use alternative sources of funds not permitted for other mortgages Freddie Mac purchases. Does not require a minimum down payment from borrower funds. Applies to the purchase or refinance of one-unit primary residences only. 6) Guaranteed (Section 502) Rural Housing (GRH) Mortgages Available to borrowers who live in rural areas. Property must meet the designation of "rural" as defined by the Rural Housing Service (RHS). Applies to the purchase or refinance of one-unit primary residences only Not available for farms. 7) HUD-Guaranteed Section 184 Native American Mortgages Guaranteed by the U.S. Department of Housing and Urban Development. The mortgage file must contain documentation of the land status and show what court system has jurisdiction over the land. Applies to the purchase of a 1- to 4-unit primary residence; however, owner occupancy is not required for Tribally Designated Housing Entities, Indian Housing Authorities or an Indian Tribe.

Summary/Review::

Ginnie Mae developed the first mortgage-backed security in 1970. This security was backed by a pool of FHA and VA mortgages. Ginnie Mae doesn't purchase mortgages; it guarantees that the monthly payments will be made every month. Ginnie Mae has two types of mortgage-backed securities (MBS) programs. Ginnie Mae I MBS are based on single-family pools and are Ginnie Mae's most heavily-traded MBS product. Ginnie Mae II MBS are modified pass-through mortgage-backed securities. Fannie Mae pools loans that generally conform to their standards and converts them into single-class mortgage-backed securities known as Fannie Mae MBS, which they then guarantee as to timely payment of principal and interest. The mortgages that back a Fannie Mae MBS are held in a trust on behalf of Fannie Mae MBS investors and are not Fannie Mae assets. Fannie Mae has two automated underwriting systems available for users. Desktop Underwriter (DU)® Desktop Originator (DO)® Fannie Mae has three important special programs available. Neighborhood Champions mortgages make home buying easier for teachers, police officers, firefighters, nurses, hospital workers and other community service professionals. American Dream Commitment is Fannie Mae's ten-year pledge to help 6 million families, including 1.8 million minority families, become first-time homeowners. America's Living Communities Plan supports communities' visions for neighborhood revitalization and development. Fannie Mae has developed a variety of mortgage products that include the following: Adjustable Rate Balloon Fixed Rate Home Construction & Renovation No/Low Down Payment Reverse Mortgages for Seniors

Freddie Mac presents a wide range of options to fund the acquisition, refinance, moderate rehabilitation, and new construction of multifamily properties that offer affordable rents to families with low- and very low- incomes. In addition to the baseline products we discussed on the previous screens, Freddie Mac provides a variety of targeted affordable initiatives and products.

Here are a few of these products. - Forward Commitment - Provides permanent, long-term financing to build or substantially rehabilitate apartment properties with either tax-exempt bond financing or low-income housing tax credits. - Bond Credit Enhancement - Provides credit en ehancements for the tax-exempt bonds of state and local housing authorities. This credit enhancement program allows these bond issuers to receive or maintain an "AAA" credit rating, so their cost of borrowing is kept low and they can make the rents on multifamily developments more affordable. - Low-Income Housing Tax Credit Investments - Investments of over $6.3 billion have helped to fund over 328,000 units in over 4,300 affordable multifamily housing communities in all 50 states, the District of Columbia and Puerto Rico. - LIHTC Tax Credit Moderate Rehabilitation -Up-front financing to accomplish moderate rehabilitation for properties funded entirely or in part with low-income housing tax-credits. Allows the tenants to remain in place during rehab.

Home Possible Mortgages:

Home Possible Mortgages offer flexible underwriting, low-to-no down payments, expanded loan-to-value (LTV) ratios and other special underwriting features to underserved qualified borrowers. - Home Possible 100 Requires no down payment. Available as fixed or ARM. Available for one-unit primary residence. Not available for manufactured home purchase. Eligible as an A-Minus mortgage. - Home Possible 97 Available for 1-to-4-unit primary residences. Also available for manufactured home purchase. Requires a 3 percent down payment on 1-2-unit homes. Requires a 5 percent down payment on 3-4-unit residences and manufactured homes. Available as fixed or ARM. Requires two months' reserves on 2- to 4-unit homes. Reserves cannot come from gift funds.

As we have discussed, Ginnie Mae and Fannie Mae were created to deal primarily with the purchase of FHA and VA loans. Because of this, there was a need to develop a mortgage-backed security for conventional loans.

In 1971, the Federal Home Loan Mortgage Corporation, known as Freddie Mac, introduced the first security backed by conventional loans.

Freddie Mac has an electronic underwriting system called:

Loan Prospector®. Some of the Loan Prospector® features include: - Offers lenders three easy-to-learn documentation levels, which allow them to collect only the amount of information actually needed from the borrower. - Allows lenders to easily access merged credit reports from the various credit reporting agencies. The agencies that provide merged reports to Loan Prospector® lenders are: CBCInnovis Equifax Mortgage Solutions FIS Credit Services First American CREDCO Kroll Factual Data LandAmerica LandSafe - Provides feedback to lenders concerning the minimum collateral assessment that is required for the loan to be eligible for sale to Freddie Mac. Whether the lenders use Loan Prospector® or choose to manually underwrite the loan, they will have access to a wide variety of fixed-rate and adjustable rate products that Freddie Mac will agree to purchase.

Summary/Review:

The secondary mortgage market consists of holding warehouse agencies that purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors. Mortgage funds can be shifted to where they are most needed in a variety of ways. Lenders can sell loans to one another. One institution can sell a part interest in a block of loans to another institution. A more common way of shifting funds is through the use of mortgage-backed securities (MBS), which are backed by a pool of mortgages. Important players in the secondary mortgage market are: Ginnie Mae - Government National Mortgage Association (GNMA) - a government agency Fannie Mae - Federal National Mortgage Association (FNMA) - a former government agency that became a private corporation in 1968 Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMC) - a quasi-government agency These agencies, collectively known as government-sponsored enterprises (GSE), purchase loans or guarantee mortgage-backed securities issued by lenders.

Home Possible Neighborhood Solutions Mortgages:

These are available to borrowers who are teachers, school administrators, law enforcement officers, fire fighters, health care workers or active or retired members of the United States Armed Forces or a reserve unit. Home Possible Neighborhood Solutions 100 and Home Possible Solutions 97 are basically the same as the Home Possible 100 and Home Possible 97 mortgages detailed above, except for these differences: Governed by area median income limits in most cases. Debt-to-income ratio of 45 percent. One month reserves required, which can come from a gift.

Balloon/Reset Mortgages:

These loans come with either 5- or 7-year terms. The mortgage is amortized over 15, 20 or 30 years, but the payments are fixed for the first 5 or 7 years. At the end of the fifth or seventh year, a balloon payment for the remaining principal balance comes due. The borrower has the option to reset the interest rate, if the reset conditions are met, for the remaining term of the loan in lieu of the balloon payment.

Initial Interest:

These mortgages require interest-only payments for a specified period of time beginning with the first monthly payment after the note date, and principal and interest payments on a fully-amortized basis for the rest of the mortgage term. These loans can be fixed-rate, 30-year loans set up as 10/20 (interest only for 10 years) or 15/15 (interest only for 15 years). Or the mortgage could be set up as an ARM. These loans can be for a one-unit primary residence. Manufactured homes and coops are not eligible.

Alternative Stated Income Mortgage:

This product allows the use of stated self-employed income for self-employed borrowers as long as they provide verification of two years' self-employment in the same business. This loan is for the purchase of a one-unit primary residence. The loan can be a fixed-rate, ARM or balloon/reset loan. In addition, the borrower must provide the greater of $25,000 or 25% down payment from his or her own funds. The funds may come from cash or other equity; however, the guidelines do not permit the funds to come from gifts, grants or sweat equity.

A-Minus Mortgage:

This product is designed for persons whose credit histories are less than perfect. Borrowers can get a fixed mortgage or an ARM to either purchase or refinance a 1-4 family residence, a second home or investment property.

Check Your Understanding-Answers:

What is the role of the secondary mortgage market? The secondary mortgage market consists of holding warehouse agencies that purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors. Who are the three major players in the secondary mortgage market? Ginnie Mae Fannie Mae Freddie Mac What was the first mortgage-backed security called and why was it called this? It was called a pass-through security because the monthly principal and interest payments were collected from the borrowers and then "passed through" to the investors. What is Ginnie Mae's most heavily traded product and what is the minimum pool size? Ginnie Mae I MBS (Mortgage-Backed Securities) are the most heavily-traded MBS product, based on single-family pools. The minimum pool size is $1 million.

Today's rate of successful home ownership has been threatened by predatory lending practices. Before we discuss what Freddie Mac is doing to help combat this problem, let's talk about predatory lending in general.

When a qualified borrower is approved for a mortgage loan, the loan is referred to as "A" paper. A less qualified borrower, perhaps one with credit problems, may have to take a loan at a higher rate of interest, referred to as "B" paper. More serious credit problems might lead to "C" paper, and there is even a category of "D" paper for those with overwhelming credit problems.

In the 1980s, many financial institutions found their depositors withdrawing funds and investing in mutual funds and bonds which were paying higher interest rates.

With this loss of funds, even less money was available to support the demand for loans, so the institutions were forced to rely even more on the secondary market for funds.

Similar to Ginnie Mae and Fannie Mae, Freddie Mac buys conventional loans from savings banks, commercial banks and mortgage companies, assembles the loans into a pool of mortgages and issues a security backed by the mortgages. This security is called:

a Participating Certificate or Guaranteed Mortgage Certificate.

One might ask why lenders don't just keep the loans they make instead of selling them on the secondary market. That approach could work if every lender had

a balance between the demand it has for loans and the supply of money to which it has access. But that is rarely the case. -So loans get sold on the secondary market in an effort to shift money from areas that have a surplus to those areas that have a shortage.

As we mentioned on the previous screen, Fannie Mae sets limits for its loans. Any loan that falls within these limits and meets other Fannie Mae guidelines is called:

a conforming loan. -As we said, the loan limits are adjusted each year in January and are based on the average home price for single-family homes financed by conventional mortgages. As of January 2013, the loan limits are as follows: First mortgages One-family home: $417,000 Two-family home: $533,850 Three-family home: $645,300 Four-family home: $801,950 Note: One- to four- family mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands are 50 percent higher than the limits for the rest of the country. Second mortgages $208,500 In Alaska, Hawaii, Guam, and the U.S. Virgin Islands: $312,750 Most loans Fannie Mae purchases are well below the conforming limit.

Under the 1968 Charter Act, Fannie Mae became:

a fully private company operating with private capital on a self-sustaining basis. As a separate, privately-owned corporation, Fannie Mae became subject to federal corporate income tax, but it was exempt from state income taxes.

Loans that don't meet the Fannie Mae guidelines including the loan limits above are called nonconforming loans. Even though Fannie Mae sets loan limits, a purchaser may pay any price for a property and make up the difference in cash. Any loan that exceeds the conforming loan limits is called a:

a jumbo loan. -Jumbo loans usually have a higher rate of interest, may require a larger down payment, and vary in qualifying ratios and other underwriting criteria. There is a strong secondary market for packages of these larger loans, but each individual investor will set their own standards.

Farmer Mac, the Federal Agricultural Mortgage Corporation (FAMC), was created:

by Congress in 1988 to - establish a secondary market for agricultural real estate and rural housing mortgage loans and to - increase the availability of long-term credit at steady interest rates to American farmers, ranchers and rural homeowners. Farmer Mac deals with agricultural loans in the same way that Fannie Mae and Freddie Mac deal with conventional and government loans. Farmer Mac provides liquidity and lending capacity to agricultural mortgage lenders in these ways: - Purchases newly-originated and pre-existing eligible mortgage loans directly from lenders and pre-existing eligible mortgage loans from lenders and other third parties in negotiated transactions - Issues long-term standby purchase commitments ("LTSPCs") for newly-originated and pre-existing eligible mortgage loans. - Exchanges newly-issued agricultural mortgage-backed securities guaranteed by Farmer Mac for newly-originated and pre-existing eligible mortgage loans that back those securities in "swap" transactions. - Purchases and guarantees mortgage-backed bonds secured by eligible mortgage loans, which are referred to as AgVantage bonds.

The Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"):

clarified and modified several of HUD's regulatory powers over Fannie Mae. -required HUD to respond within 45 days to any request for new program approval made by Fannie Mae under the 1968 Charter Act and authorized Fannie Mae to purchase and deal in subordinate lien mortgages.

America's Living Communities Plan supports:

communities' visions for neighborhood revitalization and development. Fannie Mae works closely with lenders, developers, government entities, and nonprofit organizations to help them achieve their affordable housing goals and invest in their communities. To this end, Fannie Mae will invest up to $3 billion over the 10 years of the American Dream Commitment.

In 1938, the federal government established Fannie Mae to increase the flow of mortgage money by:

creating a secondary market to purchase Federal Housing Administration (FHA)-insured mortgages. After World War II, Fannie Mae's authority was expanded to include VA-guaranteed mortgage loans. At that time, Fannie Mae purchased FHA and VA loans at par - meaning at full face value.

The Emergency Home Finance Act of 1970 gave Fannie Mae the authority to :

deal in conventional mortgages. However, several eligibility restrictions and/or risk sharing requirements were imposed on the mortgages: - Fannie Mae could buy in order to ease any credit concerns raised by the acquisition of conventional mortgages. -This new law also required the HUD Secretary to provide prior approval of Fannie Mae's purchase of conventional mortgages.

When Fannie Mae purchases mortgages, they:

execute a servicing agreement which allows the loan originator to be the collection agent and receive a fee. - The loan originator can receive a potentially substantial income from these fees, which range from 1/4 to 3/8 of one percent of the loan amount. Obviously, the greater the size of the loan portfolio, the greater the income for the loan originator.

The secondary mortgage market consists of:

holding warehouse agencies that purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors.

A REMIC can issue mortgage securities:

in a wide variety of forms. Fannie Mae and Freddie Mac are among the major issuers of REMICs, along with privately-operated mortgage conduits owned by mortgage bankers, mortgage insurance companies and savings institutions.

When Fannie Mae sells mortgages, it does so

in open-market transactions. Purchasers must pay current prices for the securities in these transactions. Sales of Fannie Mae mortgages usually peak when there are limited opportunities for other investments.

A REMIC is an:

investment-grade mortgage bond that separates mortgage pools into different maturity and risk classes.

Ginnie Mae doesn't purchase mortgages;

it guarantees that the monthly payments will be made every month. Because Ginnie Mae is a government agency, its guarantee is backed by the "full faith and credit" of the United States government. In return for this guarantee, Ginnie Mae collects a small fee from the lender every month.

Ginnie Mae developed the first:

mortgage-backed security in 1970. This security was backed by a pool of FHA and VA mortgages. -It was called a pass-through security because the monthly principal and interest payments were collected from the borrowers and then "passed through" to the investors.

As we said earlier, mortgage-backed securities are pools of mortgages that are used as collateral for issuing securities called

pass-through certificates.

The REMIC assembles mortgages into:

pools and issues pass-through certificates, multiclass bonds or other securities to investors in the secondary mortgage market. Mortgage-backed securities issued through a REMIC can be other debts that were financed by the issuer or a sale of assets.

Lenders who originate loans; that is, they lend money directly to borrowers. These lenders make up what is known as the

primary mortgage market. -Loans originated in the primary mortgage market can be bought, sold or traded in the secondary mortgage market. -Primary lenders sell their notes to generate more money to make more loans.

Its role was expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader cross-section of Americans. Fannie Mae could:

purchase mortgages at premium, which is in excess of par, and was given the authority to issue mortgage-backed securities. -The 1968 act also provided for continuing HUD oversight of Fannie Mae to ensure Fannie Mae's adherence to its public purpose.

The Tax Reform Act of 1986 created a special tax vehicle called a:

real estate mortgage investment conduit (REMIC) for entities that issue multiple classes in investor interest that are backed by mortgage pools.

The Charter Act of 1954 "rechartered" Fannie Mae by

removing government backing for money borrowed to fund Fannie Mae's secondary market operations and allowing Fannie Mae to finance through private capital. -Fannie Mae could now sell its mortgages in addition to purchasing new loans. -Where previously Fannie Mae had purchased at par, now purchases could be made at whatever discounted price would give a reasonable rate of return. - In addition, Fannie Mae could now establish its own criteria for accepting a mortgage that was submitted to it for sale; it did not have to purchase every submitted mortgage.

Fannie Mae pools loans that generally conform to their standards and converts them into:

single-class mortgage-backed securities known as Fannie Mae MBS, which they then guarantee as to timely payment of principal and interest. -The mortgages that back a Fannie Mae MBS are held in a trust on behalf of Fannie Mae MBS investors and are not Fannie Mae assets. -As a Fannie Mae MBS investor, the certificate holder receives a pro rata share of the scheduled principal and interest from mortgagors on the loans backing the security. -Interest is paid at a specific interest rate. The certificate holder also receives any unscheduled payments of principal.

A REMIC is a conduit for

tax purposes, meaning that the income of the REMIC is passed through to the investors who report the income on their individual tax returns. - The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders. - A REMIC itself is exempt from federal taxes, although income earned by investors is fully taxable. - As a tax-exempt entity, a REMIC may invest only in qualified mortgages and permitted investments, including single family or multifamily mortgages, commercial mortgages, second mortgages, mortgage participations, and federal agency pass-through securities. - Credit card receivables, leases, and auto loans are not eligible investments.

In the 1970s, most lending institutions had enough money from their savings depositors to be able to finance the loans they made. However, by the late 1970s, the loan volume had increased greatly and

the institutions were forced to sell more loans because their rate of new deposits was not enough to meet the higher loan demand.

There are some borrowers in the market who have been labeled as unscoreables, because:

they have paid for things mostly in cash resulting in a very thin credit file. In order not to lose this potentially creditworthy group of borrowers, many lenders are using "nontraditional" models of credit scoring that use payment history of items such as rent and utilities, as a way of gauging a customer's ability to pay their debts. Here is a description of some of these tools. Expansion Score - Developed by the Fair Isaac Corporation, creators of the FICO score model, the Expansion score analyzes data regarding the consumer and generates a 3-digit score based on criteria assembled from "nontraditional" sources, such as utility bill payments and usage of "payday loan" centers. Interestingly, the Expansion score does not use rental payments as a criterion for creating the score, as they don't consider it a sufficient enough gauge of a person's ability to pay their debts. Anthem - The Anthem score follows traditional scoring models, but incorporates data from a wide base of sources, ranging from rental and utility payments to non-deductible insurance payments and regular child-care expenses. The Anthem score impressed the Massachusetts-based housing and lending agency MassHousing, so they adopted their score as a tool to underwrite loans in April 2005. Debit Report Suite - Developed by eFunds, Debit Report Suite integrates the eFunds DebitBureau database with ChexSystems reports to provide a comprehensive history of a person's payment, spending, and lending habits, all without ever touching a credit card. PRBC Approach - The Payment Reporting Builds Credit (PRBC) reporting agency, based in Annapolis, Maryland, uses rental and utility payments to create a "report card" that grades users on a scale from A to D, highest to lowest. The "weighted" approach of the scorecard places highest emphasis on lease and mortgage payments, followed by utility and auto payments.

Freddie Mac's mission is:

to provide stability, affordability and opportunity to the housing market. - Freddie Mac is dedicated to putting home ownership within reach for minority populations. - In addition, Freddie Mac strives to make rental housing more affordable through its Program Plus, Standard Lease-Up and Premier Lease-Up mortgage programs for multifamily housing.

REMICs hold commercial and residential mortgages in:

trust and issue securities representing an undivided interest in these mortgages. A REMIC can be a corporation, trust, association, or partnership.

Ginnie Mae is a division:

within (HUD). -Its basic mission when it was established in 1968 was to create and operate a mortgage-backed security program for the Federal Housing Administration and Veterans Administration mortgages.

Entities that buy and sell mortgages negotiate on the basis of

yields. -Discounts are used to adjust yields, so the buyers and sellers of the mortgage notes can reach agreement and make sales.