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Chapter 23 – Mortgage Backed Securities

Chapter 23 – Mortgage Backed Securities. BA 543 Financial Markets and Institutions. Chapter 23 – Mortgage Backed. History and Background of Mortgage Market Savings and Loan Received Deposits from Saver Loan Saver’s Deposit out to Home-Buyer Saver Received 5% on investment

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Chapter 23 – Mortgage Backed Securities

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  1. Chapter 23 – Mortgage Backed Securities BA 543 Financial Markets and Institutions

  2. Chapter 23 – Mortgage Backed • History and Background of Mortgage Market • Savings and Loan • Received Deposits from Saver • Loan Saver’s Deposit out to Home-Buyer • Saver Received 5% on investment • Borrower paid 8% on loan • 3% difference was the spread that covered the management fees and profit of the transaction • Different Loan Rates Across the Country

  3. Chapter 23 – Mortgage Backed • Government Promotes Fixed Rate Mortgages • Government Agencies • Federal Housing Authority (FHA) • Originate and underwrite conforming loans • Federal National Mortgage Association (Fannie Mae) • Secondary Market for trading mortgages • Trade Insured – standardized mortgages • Granted credit line with Treasury for “squeezes” • Trouble developing the secondary market

  4. Chapter 23 – Mortgage Backed • Government Agencies Continued • Government National Mortgage Association – Ginnie Mae • Created to support the FHA and VA mortgage markets • Full Faith and Credit of the Government • Added Federal Home Loan Mortgage Association – Freddie Mac • Divided up the functions • Fannie Mae – Conventional Loans • Freddie Mac – Insured FHA and VA Loans

  5. Chapter 23 – Mortgage Backed • Mortgage Pass-Through Securities • Loans meet “standards” – Conforming Loans • Loan stamped with GNMA or FNMA or FHLMA • Bundled in a Pool • Cash Flows of Pool pledged against Issued Securities • Example of Pass-Through Transaction • Players: Home Buyers, Bank (Service Loan), Government Agency, and Capital Markets

  6. Chapter 23 – Mortgage Backed • Tranches Developed • Tranche A interest and all Principal • Tranche B interest as you go and second in line for principal once Tranche A is retired • Tranche C interest as you go and third in line for principal once Tranche B is retired • Etc. • Tranche Z last tranche. Foregoes interest and principal until all other Tranches are retired • Numerical Example….

  7. Chapter 23 – Mortgage Backed • Other Players in Mortgage Backed • Non Agency Securities • Government “wanted” to privatize the market • Needed to strengthen the secondary market • Privatize their agencies • Tax issues • Other Developments • Sequential CMOs – example • Stripping CMOs • Commercial CMOs

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