1. THE SECONDARY MORTGAGE MARKET: PASS THROUGH SECURITIES
CHAPTER NINETEEN
THE SECONDARY MORTGAGE MARKET: PASS THROUGH SECURITIES

2. Chapter Objectives
Evaluation of secondary mortgage market and FNMA and GNMA
Mortgage backed bonds and pass through securities
Implications of borrower prepayment

3. Mortgage Markets Primary mortgage market Secondary mortgage market
Lenders and borrowers
Secondary mortgage market
Conduits, investment bankers and investors
Mortgage-backed securities

4. Real Estate Debt and Equity Markets
Private
Public
Equity
Individuals, Pension Funds
Equity REITS, Real Estate Corporations
Mortgage Debt
Banks, Insurance Companies
Mortgage-backed Securities, Mortgage REITs

5. Mortgage Markets Primary mortgage market Secondary mortgage market
Lenders and borrowers
Secondary mortgage market
Federal National Mortgage Assoc. “Fannie Mae”
Federal Home Loan Mortgage Corporation “Freddie Mac”

6. Depository Lenders in the Primary Market
Commercial Banks
Savings Institutions

7. Nondepository Lenders in the Primary Market
Mortgage bankers
Mortgage brokers
Others

8. Government-Sponsored Mortgage Programs
FHA-Insured Loans
VA-Guaranteed Loans

9. FHA- Insured Loans
FHA loans are made by private lenders through various programs (e.g. section203 loans)
FHA insurance protects the lender from losses due to default and foreclosure
FHA borrowers pay an up front premium, plus a monthly premium for FHA insurance
Maximum FHA loan amounts vary depending on an area’s median house price
Minimum down payment of three percent

10. VA-Guaranteed Loans
VA loans are made by private lenders (available to U.S. Veterans)
VA guarantees the lender against loss up to 100% of a property’s value
VA charges a funding fee based on the size of the LTVR
Maximum VA loan amounts exist
No down payment is required and no discount points can be paid by the borrower

11. The Secondary Market Federal National MTG. Assoc., FNMA (Fannie Mac)
Federal Home Loan Mtg. Assoc., FHLMC (Freddie Mac)
Government National Mtg. Assoc., GNMA (Ginnie Mae)
Life insurance companies and other purchases

12. Fannie Mae, FNMA FNMA was organized in 1938 to purchase FHA loans
FNMA reorganized in 1968 and authorized to purchase conventional mtgs. in 1970
FNMA obtains funds from the sale of its stock, its MBS, by issuing bonds, and from its earnings
The MBSs issued by FNMA and the mortgages they own account for 23 percent of the residential mortgage market

13. Freddie Mac, FHLMC
FHLMC was created in 1970 to provide a secondary market for S&L associations
FHLMC currently buys both government- underwritten and conventional loans
Freddie Mac and Fannie Mae are now operationally similar
The MBSs issued by Freddie Mac and the mortgages they own represent 16 percent of the residential mortgage market

14. Ginnie Mae, GNMA GNMA was created in 1968
GNMA guarantees the timely payment of principal and interest on MBSs (primarily FHA and VA pools)
GNMA also purchases mortgages designed by the FHA for low and moderate- income buyers

15. GNMA Payment Guarantee
GNMA was empowered to guarantee timely payment of PI, on
Securities backed by FHA, VA, and FmHA
GNMA resulted in an expansion of secondary market
Pass-through securities
Default risk minimized

16. Operation of Secondary Market
Direct sale programs
Mortgage-related security pools

17. Direct Sale Programs Originators Buyers Mortgage companies Thrifts
Commercial Banks
others
Buyers
Life insurance companies
Eastern thrifts
FNMA
FHLMC

18. Mortgage Related Security Pools
MBBs
MPTs (pass through)
MPTBs (pay through)
CMOs

19. Mortgage- Backed Bonds
Fixed coupon rate
Specific maturities
Issuer retains ownership of mortgages
Mortgages pledged as security
Over collateralization

20. Mortgage- Backed Bonds Continued
Investment Rating
Quality
Diversification
Rates
Prepayment
Appraised value
DCR

21. Pricing- Calculator Solution
n= semi annual periods
I= required rate
PV= present value of bond
pmt= semi annual interest payment (stated rate)
FV= par value
Requires 4 variables to solve for yield or PV
inverse relationships between interest rates and bond prices

22. Mortgage Pass-Through Securities
Mortgage originations are pooled by lenders or FNMA or FHLMC
Originators use a securities underwriter
Securities represent an individual interest in pool
Large or small investors

23. Characteristics of Mortgage Pools
Security issuers and guarantors
Pass through
Participation certificates
MBS
Default insurance
PMI- conventional
Guarantee- VA
Insured- FHA

24. Characteristics of Mortgage Pools Continued
Payment patterns
Coupon rates and interest rates
Geographic distributions
Borrower characteristics
Pool size
Prepayment considerations
All of the above can effect pricing