Creating the Secondary Mortgage Market

Daniel HoughBA 543

May 14, 2013

What is the Secondary Mortgage Market?

Definition: The market for the sale of securities or bonds collateralized by the value of mortgage loans

Home Buyer

Fannie MaeFreddie Mac

(GSE’s)

Mortgage Lender(Bank)

Home Builder

MBS

Capital Markets

US Government US Treasury

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Early 1900’s» Home financing exclusively in private sector

˃ Life Insurers, commercial banks, and thrifts

» Short term, renewable loans˃ High down payments, short maturities, large balloon payments

» Absence of nationwide home financing market˃ Availability and pricing varied

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Great Depression» 1932 - Unemployment was at 23.6%

» 1933 - 20% to 25% of the nations home mortgage debt was in default

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Federal Home Loan Bank Act - 1932» Primary federal regulation of the housing and savings

loan industry» Assisted individuals» Provided low cost funds to banks» Designed to lower the cost of home ownership

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Home Owners Loan Act - 1933» Part of the New Deal by F.D.R.» Created the Home Owners Loan Corporation

˃ Key role was to refinance mortgages and to slow down foreclosures˃ Introduced the long term, fixed rate, self-amortizing mortgage˃ Short lived

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

National Housing Act - 1934» Additional part of the New Deal by F.D.R.» Established Federal Housing Administration» Offered federally backed insurance for loans by FHA

approved lenders˃ Protected approved lenders against loss˃ Added security˃ Expanded pool of potential home buyers

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Fannie Mae - 1938» Amendment to the National Housing Act of 1934» Created Fannie Mae as a federal government agency

˃ Federal National Mortgage Association (FNMA)

» Mandated to act as a secondary mortgage market facility˃ Purchase, hold, and sell FHA insured loans

» Created liquidity in the mortgage market

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Servicemen’s ReadjustmentAct - 1944

» GI Bill» Created the Veterans Administration (VA) mortgage

insurance program» Federally guaranteed loans» Offered U.S. Veterans long term, low cost mortgages

˃ Designed to help veterans readjust to civilian life˃ Helped veterans buy houses and reestablish good credit

» Fannie Mae began to purchase VA loans in 1948

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Federal National Mortgage Association Charter Act - 1954

» Transformed Fannie Mae from a government agency into a public-private, mixed ownership corporation

» Exempted Fannie Mae from all state and local taxes, (excluding real property)

Pre 1930’s 1930’s 1940’s 1950’s 1960’s 1970’s

Housing and Urban Development Act - 1968

» HUD» Separated Fannie Mae into two separate entities» Reorganized Fannie Mae

˃ For profit, shareholder owned˃ Removed from federal budget˃ Began funding operations through stocks and bonds˃ Became a GSE

Pre 1930’s 1930’s

Housing and Urban Development Act - 1968

» Created Ginnie Mae» Government National Mortgage Association

˃ Government owned corporation within HUD˃ Guaranteed timely payment and interest on privately issued MBS˃ Collateralized by FHA, VA, and other government insured or guaranteed

mortgages˃ Mission to expand affordable housing

Pre 1930’s 1930’s

Emergency Home Finance Act - 1970» Federal Home Loan Mortgage Corporation (Freddie Mac)

˃ GSE˃ Helped thrifts manage interest rate risk challenges˃ Purchased long term conforming and conventional mortgages ˃ Issued MBS˃ Further expanded the secondary mortgage market

» Authorized Fannie Mae and Freddie Mac to buy and sell mortgages not insured or guaranteed by the federal government˃ Loans required insurance from private mortgage insurance companies

» GSE’s purchase mortgages˃ Fannie Mae – Focused on private lenders˃ Freddie Mac – Focused on thrifts ˃ Package loans into mortgage backed securities and sell them to investors˃ May keep some bonds on their books˃ Buy and hold mortgage securities packaged by others

» Ginnie Mae guarantees payment˃ A bank or other institution bundles a group of FHA or VA mortgages backed

by mortgages and sells to investors˃ Ginnie Mae insures the bond for a fee˃ The bank collects mortgage payments from borrowers and passes payments

to Ginnie Mae, which passes them to the investors.

3 Entities with 3 Different Roles

Questions?