Creating the secondary mortgage market:

history and players

Qingxing Rao

Agenda

History and basic information of secondary mortgage market

5 players concerned

The process of creating the secondary mortgage

Start of the secondary mortgage

Franklin Roosevelt signed The National Housing Act of 1934

Federal Housing Administration was set up to provide guarantee to banks and saving institutions in case of loan default

Result:

Fannie Mae was created in 1938

purpose: free up capital and ensure liquidity in mortgage market.

Bought mortgages from banks either keep in own portfolio or sell to investors

Issued the first mortgage-backed security(MBS) in 1968

Ginnie Mae

Was set up in 1968 by government

Purpose: ensure Federal Housing Administration (FHA) loans and Veterans Administration (VA) loans, as well as other special government lending programs

Freddie Mac

Set up in 1970

Purpose: offset Fannie Mae’s monopoly

Issued first Participation Certificate (PC) in 1971

Similarities among three organizations

All of them are government sponsored enterprises (GSEs)

Functions: Support the liquidity and stability of secondary market

Differences

Ginnie Mae Government institution Guarantee the

secondary mortgage Payment to investors is

supported by government: means payment is ensured

Fannie Mae and Freddie Mac Independent entities Guarantee and issue the

secondary mortgage Payment to investors is

not ensured

Both are taken over by government in 2008

4.5 trillion are secondary mortgage-backed securityAbout 34% of total grade bond market

Questions for you

What is the function of Freddie Mac? A. offset Fannie Mae’s monopoly B. free up capital C. ensure liquidity in the secondary market D. B & C

Which of following is/are under control of government? A. Fannie Mae B. Freddie Mac C. Ginnie Mae D. All of above

Which one of the following is right? Security issued by Fannie Mae is called Participation

Certificate Security issued by Ginnie Mae is called participation

certificate Security issued by Freddie Mac is called participation

certificate All above are rightFannie Mae is set up in ___? 1934 1938 1968 1970

The process of creating the secondary mortgage

5 players concerned in creating the secondary mortgage

1.Borrowers

2.Banks

3.conduits: Fannie Mae, Freddie Mac

4.Government

5.the secondary mortgage market

1st step: fill out the loan application with financial information and pay application fee

2nd step: bank will evaluate the credit of borrower. Payment-to-income ratio (PTI): measures the ability of

monthly payment.

Lower PTI ratio easier to afford monthly payment. Loan-to-value ratio (LTV): measures the amount of the

loan to the market value of the property.

Lower LTV ratio greater protection for lender

3rd step: borrower signs the commitment letter, pay commitment fee, and wait for 30-60 days to get loan

Commitment letter obligates the lender to perform Borrower has the right to get money from this bank or

not

What happens in this 30-60 days?

4th step: bank sells the mortgage to, say, Fannie Mae

5th step: Fannie Mae pools mortgages and creates mortgage-backed security

Agency pass-through security Agency collateralized mortgage obligation Agency stripped mortgage-backed security

6th step: Fannie Mae sell the security to investors in the secondary mortgage market and the fund collected by Fannie Mae are transferred to borrowers through banks (borrower gets the loan)

7th step: borrower pay monthly payment to bank, the payment then transferred to investor through banks

Which player I missed?

A. Borrower

B. Bank

C. Government

D. Conduits

E. Market

What is the function of the government?

Guarantee the payment for Ginnie Mae

Investors can get payment from government when borrowers default monthly payment

Lent money to Fannie Mae and Freddie Mac

Conclusion

Development of the secondary mortgage marketFannie Mae, Ginnie Mae, and Freddie MacSimilarity and difference among these three

companiesHow big the secondary mortgage market is

5 players

The seven steps to create a secondary mortgage

Reference

http://www.themonticellogroup.com/American_Mortgage_Market.pdf

http://seekingalpha.com/article/150723-getting-a-handle-on-the-u-s-bond-market

http://www.sec.gov/Archives/edgar/data/310522/000095013308000795/w48295e10vk.htm

http://critical-thinker.net/?p=1380

Questions?