Chapter 24 – Mortgage Backed

Original 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

Chapter 24 – 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

Chapter 24 – 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

Chapter 24 – Mortgage Backed

Mortgage Pass-Through Securities Loans meet “standards” 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

Chapter 24 – 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