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CHAPTER NINETEEN

CHAPTER NINETEEN. THE SECONDARY MORTGAGE MARKET: PASS THROUGH SECURITIES. Chapter Objectives. Evaluation of secondary mortgage market and FNMA and GNMA Mortgage backed bonds and pass through securities Implications of borrower prepayment. Mortgage Markets. Primary mortgage market

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CHAPTER NINETEEN

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  1. CHAPTER NINETEEN THE SECONDARY MORTGAGE MARKET: PASS THROUGH SECURITIES

  2. Chapter Objectives • Evaluation of secondary mortgage market and FNMA and GNMA • Mortgage backed bonds and pass through securities • Implications of borrower prepayment

  3. Mortgage Markets • Primary mortgage market • Lenders and borrowers • Secondary mortgage market • Conduits, investment bankers and investors • Mortgage-backed securities

  4. Real Estate Debt and Equity Markets

  5. Mortgage Markets • Primary mortgage market • Lenders and borrowers • Secondary mortgage market • Federal National Mortgage Assoc. “Fannie Mae” • Federal Home Loan Mortgage Corporation “Freddie Mac”

  6. Depository Lenders in the Primary Market • Commercial Banks • Savings Institutions

  7. Nondepository Lenders in the Primary Market • Mortgage bankers • Mortgage brokers • Others

  8. Government-Sponsored Mortgage Programs • FHA-Insured Loans • VA-Guaranteed Loans

  9. FHA- Insured Loans • FHA loans are made by private lenders through various programs (e.g. section203 loans) • FHA insurance protects the lender from losses due to default and foreclosure • FHA borrowers pay an up front premium, plus a monthly premium for FHA insurance • Maximum FHA loan amounts vary depending on an area’s median house price • Minimum down payment of three percent

  10. VA-Guaranteed Loans • VA loans are made by private lenders (available to U.S. Veterans) • VA guarantees the lender against loss up to 100% of a property’s value • VA charges a funding fee based on the size of the LTVR • Maximum VA loan amounts exist • No down payment is required and no discount points can be paid by the borrower

  11. The Secondary Market • Federal National MTG. Assoc., FNMA (Fannie Mac) • Federal Home Loan Mtg. Assoc., FHLMC (Freddie Mac) • Government National Mtg. Assoc., GNMA (Ginnie Mae) • Life insurance companies and other purchases

  12. Fannie Mae, FNMA • FNMA was organized in 1938 to purchase FHA loans • FNMA reorganized in 1968 and authorized to purchase conventional mtgs. in 1970 • FNMA obtains funds from the sale of its stock, its MBS, by issuing bonds, and from its earnings • The MBSs issued by FNMA and the mortgages they own account for 23 percent of the residential mortgage market

  13. Freddie Mac, FHLMC • FHLMC was created in 1970 to provide a secondary market for S&L associations • FHLMC currently buys both government- underwritten and conventional loans • Freddie Mac and Fannie Mae are now operationally similar • The MBSs issued by Freddie Mac and the mortgages they own represent 16 percent of the residential mortgage market

  14. Ginnie Mae, GNMA • GNMA was created in 1968 • GNMA guarantees the timely payment of principal and interest on MBSs (primarily FHA and VA pools) • GNMA also purchases mortgages designed by the FHA for low and moderate- income buyers

  15. GNMA Payment Guarantee • GNMA was empowered to guarantee timely payment of PI, on • Securities backed by FHA, VA, and FmHA • GNMA resulted in an expansion of secondary market • Pass-through securities • Default risk minimized

  16. Operation of Secondary Market • Direct sale programs • Mortgage-related security pools

  17. Direct Sale Programs • Originators • Mortgage companies • Thrifts • Commercial Banks • others • Buyers • Life insurance companies • Eastern thrifts • FNMA • FHLMC

  18. Mortgage Related Security Pools • MBBs • MPTs (pass through) • MPTBs (pay through) • CMOs

  19. Mortgage- Backed Bonds • Fixed coupon rate • Specific maturities • Issuer retains ownership of mortgages • Mortgages pledged as security • Over collateralization

  20. Mortgage- Backed Bonds Continued • Investment Rating • Quality • Diversification • Rates • Prepayment • Appraised value • DCR

  21. Pricing- Calculator Solution • n= semi annual periods • I= required rate • PV= present value of bond • pmt= semi annual interest payment (stated rate) • FV= par value • Requires 4 variables to solve for yield or PV • inverse relationships between interest rates and bond prices

  22. Mortgage Pass-Through Securities • Mortgage originations are pooled by lenders or FNMA or FHLMC • Originators use a securities underwriter • Securities represent an individual interest in pool • Large or small investors

  23. Characteristics of Mortgage Pools • Security issuers and guarantors • Pass through • Participation certificates • MBS • Default insurance • PMI- conventional • Guarantee- VA • Insured- FHA

  24. Characteristics of Mortgage Pools Continued • Payment patterns • Coupon rates and interest rates • Geographic distributions • Borrower characteristics • Pool size • Prepayment considerations • All of the above can effect pricing

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