Exam 4 Flashcards
Fannie Mae
Federal National Mortgage Association
Freddie Mac
Federal Home Loan Corporation
Private
- for profit
- publicly-traded
Public
- charged with providing liquidity to residential mortgage markets; in particular in low-income, historically underserved areas.
- their bonds are classified as “government securities”
swap programs
originators (banks)
- mortgages for MBS
- securitize, private credit guarantee
Cash programs
originators (banks)
- Mortgages for money
- Hold MBSs and mortgages as assets
Source of Funding
Investors
- bonds for money
- raise funds to purchase mortgages and MBSs
Cash programs (SMI)
Secondary market institutions
- MBSs for money
- Hold MBSs and mortgages as assets
Securitization
ex. 100 mortgages promising $100,000 of payments each.
- Each mortgage has 50 percent change of default
- expected value is $50,000; risk is HIGH
secondary markets
GOOD
- allow for short-term savers to fund long-term loans
- increased liquidity means less risk; more people willing to lend
- allow for foreign savers to fund domestic home borrowing
Asymmetric information problems
- lenders typically have less/worse information
- adverse selection problems
- agency (moral hazard) problems
Adverse selection problems (who)
Originators (banks)
when bad credit risks are the most likely to seek out loans, even at high interest rates.
Agency problems (who)
Investors
when borrowers incentives are not aligned with those of the lender.
Community Reinvestment Act
regulators should “consider” whether a federal insured bank was serving the needs of its “community”
Federal Housing Enterprises Financial Safety and Soundness Act
required HUD to establish affordable housing goals for the GSEs
CRA reformed to strengthen housing goals
HUD allows Fannie and Freddie to purchase subprime MBSs to fulfill their affordable housing goals.
Fed adopts “recourse rule”
- capital requirements for banks
- $10 for every $100 in commercial loans
- $5 for every $100 in mortgages
$2 for every $100 in GSE backed MBSs
Stimulus policy
increases AD
- monetary and fiscal
fiscal policy
- increases and decreases in taxes or government spending
- taxes dec. disposable incomes inc. consumption inc.
monetary policy
- increases and decreases in the money supply
- money inc. interest rates dec. imports inc.
money supply
generally accepted currency
- dollars, coins, checking accounts
- NOT gold
liquidity
the ease and quickness with which an asset can be converted into purchasing power
Monetary base (MB)
currency + deposits at federal reserve
M1
currency + checkable (demand) deposits
M2
M1 + traditional savings deposits + small time deposits + retail money market mutual funds
the fed exercises control over the MB by
- open market operations
- discount loans
open market operations
occur when the fed buys or sells bonds
discount loans
loans made by the fed to private banks
