The secondary mortgage market
what is an asset backed securitity?
Asset-backed securities are the basic form of mortgage-backed securities. They are a pool of mortgages that are securitized by Wall Street.
What happens for the borrower when their loan is sold?
Buyers have a right to know who their loan has been sold to. Whenever a loan is sold, the borrower must receive notice within 30 days. The notice will give the buyer the contact information for the new owner of the loan, letting the borrower know where to direct their payments. Besides changing where they are sending their monthly payments, the borrower won't see any real change on their end.
Which of these is an example of securitization? A. a lender combines non-conforming loans with conforming loans so they can be packaged together B. loans are packaged together so that can be insured by a GSE C. a group of loans is packaged by a lender to be sold to an investor D. frannie mae lends to high risk borrowers so lenders don't have to take the risk
C - Securitization in the secondary mortgage market is the act of pooling mortgages together to be sold to third-party investors as a packaged mortgage-backed security (MBS).
What is the difference between Fannie Mae & Freddie Mac?
-the only significant difference between the two is the size of the financial intuitions from which they purchase their mortgage loan bundles. Frannie Mae deals with larger commercial banks, whereas Freddie Mac works with smaller "thrift" banks.
What are the four major players in the secondary mortgage market?
1. Frannie Mae - 1930s 2. Freddie Mac - 1970s 3. Ginnie Mae - 1968 4. Farmer Mac
What are the main differences between Ginnie, Frannie, and Freddie?
1. Ginnie Mae deals exclusively with FHA, VA, and other government-supported mortgage loans, Fannie Mae (since the 1970s) and Freddie Mac (always) engage primarily in conventional conforming, a.k.a. non-government-supported mortgage loans. 2. Ginnie Mae guarantees the timely payment of mortgages with the backing of the U.S. government, but it does NOT issue mortgage-backed securities in its own name. In contrast, Fannie Mae and Freddie Mac issue and guarantee MBS collateralized by the mortgage loans or hold mortgage loans and MBS in their portfolios. ****In other words, Freddie Mac and Fannie Mae's loans are guaranteed by Freddie Mac and Fannie Mae, but Ginnie's loans are guaranteed by the U.S. government. This is an important distinction to make, but one that makes sense when you remember that Freddie Mac and Fannie Mae are government-sponsored, while Ginnie Mae is government-owned!***
What is the reconstruction finance corporation & why was it created?
Congress created the Reconstruction Finance Corporation, or RFC, in 1932. The RFC's purpose was to build confidence in the economy. One way they did this was by creating a mortgage company to sell and buy FHA and VA loans, making them more appealing to lenders/mortgage originators.
How is Farmer Mac different from other GSEs? A. it lends actual money B. it is a secondary market for agricultural loans C. it does not guarantee their securities D. its goal is to decrease liquidity
D - Farmer Mac is in the business of agricultural loans. But, like other GSEs, they are not a direct lender.
T/F - MSBs (mortgage backed securities) cannot be made of non-conforming loans
F - MBS pools can also be made of non-conforming loans
What is the purpose of Ginnie Mae?
Ginnie Mae (government national mortgage association) took over the housing assistence and support programs under the department of housing and urban development after Frannie Mae became a privately funded company. GINNIE MAE'S MISSION IS TO EXPAND AFFORDABLE HOUSING FINANCING.
What is the difference between Ginnie Mae & Freddie Mac/Frannie Mae
Ginnie Mae is not a GSE and is still wholly owned by the united stated government. Instead of being government sponsored, Ginnie Mae is considered a stated owned enterprice (SOE) **Ginnie Mae is different from Fannie Mae and Freddie Mac because Ginnie has the U.S. government on their side. Their mortgages are backed by the government, unlike Fannie Mae and Freddie Mac.**
a type of financial services corporation created by the United States Congress with the goal of enhancing the flow of credit to targeted sectors of the economy.
Government sponsored enterprise (GSE)
Why would a bank prefer to sell to Ginnie Mae vs. Freddie Mac or Frannie Mae?
Liability for the mortgages falls on the banks that create the mortgages, which makes Ginnie Mae less responsible for what happens if someone is delinquent on their house payments, but they also give banks the benefit of securitization. For Fannie Mae and Freddie Mac, the banks pass responsibility onto them, putting them at higher risk.
What does the securities dealer do?
Securities dealers usually come to buy the MBSs after they have been created. They then sell the MBSs to investors, but in order to do this, they create asset-backed securities (ABS), collateralized debt obligation (CDO), and collateralized mortgage obligation (CMO).
T/F - Aggregators Not only do they originate loans, but they also purchase newly-originated loans from smaller originators
T
T/F - Because government-sponsored enterprises like Fannie Mae and Freddie Mac work to increase mortgage availability, they are also doing their part in keeping interest rates down
T
T/F - GSE securities carry NO explicit government guarantee of creditworthiness, but lenders grant them favorable interest rates, and the buyers of their securities offer them high prices
T
T/F - In 1938, the Federal National Mortgage Association (FNMA), or Fannie Mae, was created by the RFC.
T
T/F - Mortgage bankers use what's called a warehouse line of credit, which is just a fancy way to say a line of credit given to mortgage bankers for the purpose of creating mortgages
T
T/F - Often the securities involve a guaranty so that the investor will receive the full monthly payment from the secondary market agency, whether or not payment has been collected from all of the borrowers.
T
T/F - Selling the mortgages on the secondary market allows the overhead of the note to rest with investors who are comfortable having their money "out there" for a long period. In turn, this allows the banks to reload on capital, which means they can go and originate more loans
T
T/F - The Federal Agricultural Mortgage Corporation, usually referred to as Farmer Mac, is a government-sponsored enterprise focusing on agriculture loans
T
T/F - The last party involved is the investor. These include insurance companies, banks, pension funds, foreign governments, hedge funds, and government-sponsored enterprises. Investors choose investments based on their amount of risk and prepayment penalties
T
T/F - the mortgage market has a two tiered structure
T
What is the most well known guideline for a conforming loan?
The most well-known guideline is the size of the loan, which as of 2019, was generally limited to $484,350 for single-family homes in the continental US. Other guidelines include the borrower's loan-to-value ratio (i.e., the size of down payment), debt-to-income ratio, credit score and history, documentation requirements, etc.
The mortgage brokers act as independent agents for the mortgage bankers, but in the end, both of these entities end up turning around and selling these mortgages into the secondary market very quickly upon origination. Why would they want such a quick turnaround?
The reason for the quick turnaround time in selling the loan is so the loan can be sold before the interest rate changes.
Would a GSE be considered a financial intermediary?
Yes- GSEs act as financial intermediaries to assist lenders & borrowers in housing and agriculture. Remember, in finance, intermediation is the middle man in the transaction. As you will learn in this chapter, the GSEs are the link between the loan providers and the investors who purchase the packaged loans. And in doing so, they are acting as intermediaries.
these people work with government-sponsored enterprises, such as Freddie Mac and Fannie Mae, and create mortgage pools that they can turn into mortgage-backed securities (MBSs).
aggregator
How does a secondary market agency create mortgage backed securities?
by buying a large number of mortgage loans, pooling them together, and pledging the pool as collateral for the securities (investment instrument).
To make it easier to package and sell loans on the secondary market, Fannie Mae and Freddie Mac have certain standards for the loans they buy. A loan that meets these standards is known as a _________
conforming loan
What is this - -Federal Agricultural Mortgage Corporation -The mission is to provide a secondary market for agricultural real estate mortgage loans, rural housing mortgage loans, and rural utility cooperative loans.
farmer mac
What is this deals with larger commercial banks Federal National Mortgage Association
frannie mae
what is this Federal Home Loan Mortgage Corporation deals with smaller "thrift" banks
freddie mac
What is this Government National Mortgage Association not a GSE
ginnie mae
this means that the lender cannot convert a mortgage to cash
illiquid
investment instruments that have mortgages as collateral
mortgage backed securities
The freedom to sell mortgages easily is known as...
mortgage liquidity
Loans that do not fit Fannie Mae or Freddie Mac guidelines are called...
non-conforming loans
The act of pooling together debt to be sold to investors is know as...
securitization
a fancy word for an investment instrument
security
a government sponsored enterprise that purchases FHA and VA loans, as well as conventional conforming loans.
the federal national mortgage association - or Fannie Mae
What i Freddie Mac?
the focus for Freddie Mac is on buying conventional loans from depository institutes. Buying loans from depository instutions encourages further lending by returning working capital back to the banks, and essentially means that the loans are insured by the US government
What is the secondary mortgage market?
this is where mortgages are bought and sold
How do GSEs fund their operation?
through securitization - the securities are sold to investors, who receive a return on their investment in the form of periodic payments (usually monthly) from the agency.
What is the primary reason for the creation of the secondary market after the great depression?
to help solve the issue of illiquid mortgages. Without a secondary market for mortgages, mortgages are a simple two-way street: a lender lends money to a buyer, then the buyer pays the lender back with interest. But once the lender lends their funds to the borrower, the lender has to wait years in order to realize a profit. And if enough people want to take out a mortgage with a lender, the lender would end up emptying the vaults and not having any funds left for future borrowers.
Who is purchasing the mortgages on the secondary market?
usually the buyer is a government-sponsored enterprise (GSE), such as fannie mae and freddie mac. But they can also be private investors.
All of the secondary market agencies engage in what two main activities?
1. buying loans 2. issuing mortgage-backed securities
When a secondary mortgage market agency buys a loan from a lender, they will do one of two things with the loan....
1. hold onto the mortgages for their portfolio. in turn, they receive the funds from mortgage payments 2. package groups of mortgages to create mortgage backed securities (MBSs), which are then sold to investors
Explain he two tier mortgage market?
1. the mortgage is originated in the primary mortgage market. The lender gives the borrower money, and the borrower promises to repay the lender 2. the lender then sells the mortgage on the secondary mortgage market. Now the borrower needs to pay back whoever the lender sold the mortgage to
Who are the various parties involved in the home mortgage process?
1. the mortgage originator 2. the aggregator 3. securities dealer 4. investors
How do mortgage originators make their money?
1. when originating the loan, they charge the borrower origination fees 2. when selling the loan, they charge a premium based on the interest rate of the loan
Which of the following is a difference between Fannie Mae and Freddie Mac? A. Frannie mae deals with larger commercial banks B. freddie mac deals with larger commercial banks C. frannie mae does not engage with government supported loans D. Freddie mac does not engage with government supported loans
A
Loans that do not fit Fannie Mae or Freddie Mac guidelines are called non-conforming loans. MBS pools can also be made of non-conforming loans. Who typically purchases these?
These loans are usually bought by hedge funds or private investors or someone who wants to take a bigger risk with their investments. A single MBS may have any number of investors, similar to how a stock would have many owners.
What is the difference between collateralized debt obligations (CODs) & collateralized mortgage obligations (CMOs)?
They both look similar on the outside (as in, they are pools of risky and non-risky mortgages, divided by risk). But while CMOs are backed by mortgages, CDOs are backed by mortgages plus other debts (other loan types).
