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PPT : The Secondary Mortgage Market for Real Estate Loans
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* Market for publicly traded mortgage securities originated with federal gov’t involvement in the residential market
* Government created a series of “alphabet soup” agencies to:
o Facilitate flows of capital nationwide by creating liquidity in the market
o Promote home ownership broadly, specifically among middle class
Federal National Mortgage Association – “Fannie Mae”
* Founded in 1938
* Initial federal agency designed to broaden the residential marketplace
* Initial Objectives of the agency:
o Create a secondary market for loans
+ A source of loan repayment besides amortization of outstanding mortgage loans
o Manage outstanding loans
o Provide special assistance programs for homeowners
How Fannie Mae Works
* FNMA actually issues its own debt in the public markets
o Debt has a very low coupon
o Even though private today, it is perceived as a quasi public/private entity
+ assumed to enjoy the full faith and credit backing of the U.S. government
* Uses proceeds from these offering to purchase loans from loan originators
o FNMA’s low issuance cost allows it to earn a spread between the interest expense on its debt and the yield on purchased mortgage loans
Government National Mortgage Association – “Ginnie Mae”
* Established in 1968 when FNMA was spun off as a private entity
* Objectives:
o Manage and liquidate mortgages previously acquired by FNMA
o Offer federally subsidized housing programs
o Private a federal guarantee for FHA and VA mortgage loans
How Ginnie Mae Works
* GNMA offers a guarantee of timely payment of principal and interest on FHA, VA and Farmer Mac residential loans
* Guarantee allows these loans to be pooled into “pass-through” securities
o The original collateralized mortgage obligations ? “CMOs”
What is a CMO?
* A collateralized mortgage obligation is a separate security backed by a pool of mortgage loans
* Allows investors to acquire an undivided interest in an underlying pool of mortgages
o Creates a takeout for “whole” loans
* Interest and principal payments on the underlying mortgages provide the cash to pay the P&I on the CMO
GNMA’s role
* When the pass through securities are issued, the purchasers pay a guarantee fee to GNMA
* GNMA uses these fees to conduct its operations
* GNMA takes timing and collection risk on the mortgages backing the CMO’s
* FHA, VA and Farmer Mac provide guarantees against mortgage default on those loans
* Guarantees are priced on the historical experience with default rates
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Category : MortgageSource : www.mccombs.utexas.edu
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Tags: national mortgage, residential loans, residential marketplace, traded mortgage securities