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

2. 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

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

4. Structure

5. 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90% of subprime mortgages were ARM  According to the Financial Crisis Inquiry Report (FCIC)  Gramm-Leach-Bliley Act  Repealed the glass-stegall act  Created the shadow banking system  Hedge Funds  Investment banks  Insurance Companies  Money Market funds

6. 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

7. 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

8. Financial Crisis (Cont’d)

9. 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

10.  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)

11.  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 (2009-2013) since the 1930’s with a four year economic growth of 0.73%

12. Aftershocks (Cont’d)  Distribution of Wealth  The Federal government conducted a survey during 2007-2009, 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 1993-2013

13. 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

14.  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 2009. Global Effects (Cont’d)

15. 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

16. 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

17.  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

18. 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.

19.  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

20. Conclusion