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 security About 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 right Fannie Mae is set up in ___?

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

1 st step: fill out the loan application with financial information and pay application fee 2 nd 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 3 rd step: borrower signs the commitment letter, pay commitment fee, and wait for 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 days? 4 th step: bank sells the mortgage to, say, Fannie Mae 5 th step: Fannie Mae pools mortgages and creates mortgage- backed security Agency pass-through security Agency collateralized mortgage obligation Agency stripped mortgage-backed security 6 th 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) 7 th 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 market Fannie Mae, Ginnie Mae, and Freddie Mac Similarity and difference among these three companies How big the secondary mortgage market is 5 players The seven steps to create a secondary mortgage

Reference ge_Market.pdf ge_Market.pdf handle-on-the-u-s-bond-market handle-on-the-u-s-bond-market /w48295e10vk.htm /w48295e10vk.htm

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