1. Chapter 23 – Mortgage Backed Securities BA 543 Financial Markets and Institutions

2. Chapter 23 – Mortgage Backed History and Background of 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

3. Chapter 23 – 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

4. Chapter 23 – 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

5. Chapter 23 – Mortgage Backed Mortgage Pass-Through Securities Loans meet “standards” – Conforming Loans 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

6. Chapter 23 – Mortgage Backed Tranches Developed Tranche A interest and all Principal Tranche B interest as you go and second in line for principal once Tranche A is retired Tranche C interest as you go and third in line for principal once Tranche B is retired Etc. Tranche Z last tranche. Foregoes interest and principal until all other Tranches are retired Numerical Example….

7. Chapter 23 – 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