The Development of the Mortgage-Backed Bond Market Presented by: Renan Schiavetto and Geovany Simon

History  Fannie Mae (FNMA)  Established in 1938 with one single purpose:  “To promote home ownership in the United States”  Ginnie Mae (GNMA)  Established in 1968  First GSE to issue Mortgage-Backed Securities  Freddie Mac (FHLMC)  Established in 1970  Had the power to buy mortgages from institutions under the FDIC

History (Cont’d)  Secondary Mortgage Market Enhancement Act of 1984 (SMMEA)  Loose regulation for private companies

Structure

Government Policies  Alternative Mortgage Transaction Parity Act of 1982  Non-Federally chartered institutions able to sell ARM  ARM very popular in the 90’s  By 2006, almost 90% of subprime mortgages were ARM  According to the Financial Crisis Inquiry Report (FCIC)  Gramm-Leach-Bliley Act  Repealed the glass-stegall act  Created the shadow banking system  Hedge Funds  Investment banks  Insurance Companies  Money Market funds

Financial Crisis  Moral Hazard Problem  “No risky business”  Subprime Mortgage Boom  MBS with risky mortgages being rated AAA by rating institutions  Moody's  Fitch  Standard and Poor’s

Financial Crisis (Cont’d)  Easy Lending  Moral Hazard  Loose Regulations  Credit Risk  No Credit Check  Financial Institutions Wanted to Issue as Many Mortgages as Possible  Mortgages became assets  No-Doc Loans  No proof of income was required  Very little documentation from mortgages issued in the 2000’s

Financial Crisis (Cont’d)

Aftershocks  The average house hold in the USA lost an average of 5,800$ in income during the recession peak  The cost to the Federal government to stop the crisis was around 2,000$ on average for every household in the USA  Combined of the decreasing costs with stock values and housing values was around 100,000$ average for every household in the USA  Home values  The USA lost $3.4 trillion in real estate wealth according to the Federal government  Stock value  The USA lost around 7.4$ trillion in stock wealth  Jobs  5.5 million jobs were lost because of slow economic growth

 Income  The economic recession cost around 648$ billion dollars  Government response  Federal government implemented Troubled Asset Relief Program (TARP) that resulted a net cost to taxpayers of $73 billion Aftershocks (Cont’d)

 Gross Domestic product  Highest decrease during the recession in the 4Q of 2008 and the 1Q of 2009 with a decrease at an annual rate of 6%  2008 ended with a GDP of -0.3%, and 2009 ended with a GDP of -3.1%  The US GDP stopped shrinking by the 3Q of 2009, and has been positively growing since then until today  In 2013, the USA GDP reached its four worst years of economic growth ( ) since the 1930’s with a four year economic growth of 0.73%

Aftershocks (Cont’d)  Distribution of Wealth  The Federal government conducted a survey during , 4000 households were surveyed  63% of the American families surveyed declared a decrease in their wealth because of the 2008 financial crisis  77% of the richest families declared a decrease in their wealth  50% of the poorest families declared a decrease in their wealth  The top 1% of USA households has netted 95% of total income from 2009 and 2013, compared with the 63% of total income netted by the top 1% of USA households between the years

Global Effects  Europe  The European banking system failed mainly because the European banks recklessly borrowed money in American markets to buy risky securities  The most affected countries with a declining annual growth rate in the 1 quarter of 2009 were Germany 15.2%, 7.4% in the United Kingdom, 18% in Latvia, 9.8% in the Euro area  The 2008 financial crisis later developed into an Eurozone crisis  Middle-East  The least affected region in the world. Being oil producing countries, the Middle East region had a strong currency and a stable economy due to strong oil prices

 Asia  Slow economic growth during 2008 and 2009 mainly because being export and import based economies, and with the United States netting almost 1/3 of world’s consumption.  East Asia were the most affected part of Asia, specifically Singapore and Japan.  Singapore GDP’s dropped from a 14% annual growth rate in 2008 to a 1.1% in 2009 and Japan annual growth rate declined 15.2% during the first quarter of Global Effects (Cont’d)

Economic Regulations after 2008  Two major acts were implemented A. Dodd-Frank Wall Street Reform and Consumer protection act B. Housing and economic recovery act of 2008  Both Acts were signed by President Barrack Obama

Dodd-Frank Wall Street Reform and Consumer Protection Act  Introduced by Senator Chris Dodd in 2010, and revised by Congressman Barney Frank, signed by President Barrack Obama in 2010  Composed of 8 major regulations  Regulate credit cards, loans, and mortgages  Creation of the Consumer Financial Protection Bureau  Supervise Wall Street  The Financial Stability Oversight Council looks out for risks that affect the entire financial industry  Stop banks from gambling with depository’s money  The Volcker rule bans banks from using or owning hedge funds for their own profit purposes

 Regulate risky derivatives  Risky derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC)  Bring hedge funds trades into the light  Hedge funds must register with the SEC and provide data about their trades and portfolios  Oversee credit ranging agencies  Dodd-Frank created an Office of Credit Ratings at the SEC to regulate credit ratings agencies like Moody's and Standard & Poor‘s  Increase supervision of insurance companies  It created a new Federal Insurance Office (FIO) under the Treasury Department, its mission is to identify insurance companies that create a threat to the entire system  Reform the Federal Reserve  The Government Accountability Office (GAO) was permitted to audit the Fed's emergency loans during the financial crisis Dodd-Frank Wall Street Reform and Consumer Protection Act

Housing and Economic Recovery Act of 2008  Designed to deal with the subprime mortgage crisis and restore the public’s faith in Fannie Mae and Freddie Mac  Signed by President Barrack Obama in 2008  Composed of 7 major regulations  Granting $300 billion in insurance for mortgages.  The creation of a new regulator, the Federal Housing Finance Agency. Awarded with more power to supervise operation of the 14 housing (GSEs).Fannie Mae and Freddie Mac and the 12 Federal Home Loan Bank.

 Raises the dollar limit of the mortgages the government sponsored entities can purchase  Provides loans for the refinancing of mortgages for owner-occupants at risk of foreclosure  The new loans must be 30-year fixed loans  Enhancements to mortgage disclosures  Community assistance to help local governments buy and renovate foreclosed properties  An increase in the national debt ceiling by US$800 billion, giving the Treasury the elasticity to support the secondary housing markets Housing and Economic Recovery Act of 2008

Conclusion