The Secondary Mortgage Market

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Chapter 10

• The Secondary Mortgage Market

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Chapter 10Learning Objectives
10-1

• Understand the workings of the secondary mortgage
  market
• Understand why the secondary mortgage market is
  important for a more efficient allocation of
  funds in the real estate market, and what the
  major secondary mortgage market agencies are

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Secondary Mortgage Market
10-2

• Market where existing mortgages are bought and
  sold
• Mortgages are used as collateral for mortgage
  related securities
• Reduces reliance on deposits

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Secondary Mortgage Market Participants
10-3

• FANNIE MAE, GINNIE MAE, FREDDIE MAC
• Securitization of Mortgages
• Mortgage Related Securities
• Pass-throughs
• Mortgage-backed bonds
• Collateralized mortgage obligations (CMOs) and
  Remics

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COMMERCIAL MORTGAGE BACKED SECURTIES (CMBS)

• Started with SL crisis of 1980s when RTC
  packaged commercial loans of failed thrifts and
  sold CMBSs
• Senior tranche received all principal payments
  including prepayments
• Subordinated tranche bore all losses from defaults

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CMBS (cont.)

• Securitization process is same as for CMOs with
  different tranches
• May be backed up by many mortgages on many
  properties, a single loan on a very large
  property, or a single loan on many properties
• Loans are credit rated and contributed to a REMIC

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Secondary Mortgage Market
10-4

• FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE
  MAE)
• Established in 1938 to buy FHA loans
• Re-chartered in 1954 and became a private
  corporation
• As of 1970, allowed to buy FHA,VA, and
  conventional mortgages

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Secondary Mortgage Market
10-5

• GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE
  MAE)
• Created in 1968 within HUD
• Does not purchase mortgages or issue securities
• Market focus is to guarantee FHA and VA
  pass-through securities

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Secondary Mortgage Market
10-6

• FEDERAL HOME LOAN MORTGAGE CORPORATION (FREDDIE
  MAC)
• Established in 1970 to create a secondary
  mortgage market for conventional mortgages
• Operates as a private corporation
• Currently buys FHA, VA, and conventional mortgages

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Secondary Mortgage Market

• Freddie Mac purchases both newly issued and
  seasoned (those with some expired term) mortgages
• Freddie Mac will also purchase construction/perman
  ent loans that are FRMs, ARMs, or balloon/reset.
  These must be new dwellings and not rehabs.

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Secondary Mortgage Market

• Freddie Mac issues a wide variety of securities
• Discount Notes and Debentures
• Mortgage Participation Certificates
  (Pass-throughs) on FRMs, ARMs, and multifamily
• Collateralized Mortgage Obligations in several
  classes or tranches
• Guaranteed Mortgage Certificates not sold since
  1979

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Secondary Mortgage Market

• Federal credit agencies that support the primary
  and secondary mortgage markets
• Farm Credit System consolidated three
  agricultural agencies to make direct loans for
  agricultural purposes
• Federal Agricultural Mortgage Corporation (Farmer
  Mac) to underwrite pools of farm mortgages
  through pass-throughs

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Secondary Mortgage Market

• Federal credit agencies that support the primary
  and secondary mortgage markets
• Rural Housing Service extends loans to rural
  areas for farms, houses, and community facilities
• Financing Corporation formed in 1987 to
  recapitalize the FSLIC

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Regulation of Government-Sponsored Enterprises

• GSEs are not officially part of the federal
  government
• They appear to enjoy the backing of the federal
  government
• Federal government does not guarantee these
  agencys obligations but Congress has implied
  that federal funds might be expended to pay off
  investors

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Regulation of Government-Sponsored Enterprises

• GSEs operate similarly to thrifts in purchasing
  long-term mortgages
• They face interest rate risk, default risk, and
  management/operating risk
• Office of Federal Housing Enterprise and
  Oversight (OFHEO) oversees the operations of the
  GSEs