Lecture 13. The Secondary Mortgage Market (Part I) Flashcards
What is Secondary Mortgage Market?
Secondary Mortgage Market (SMM):
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Why is SMM important?
- Enables originators (mortgage banking companies) to sell existing mortgages and thereby replenish ? with which ?? can be originated.
- Facilitates ?? of ?:
lenders located in the regions with a high demand for housing and mortgage financing sell mortgages to other intermediaries in regions with a surplus of savings. - Increases the investing options available to individuals and institutions:
provides a strong housing finance system and encourages home ownership
Why is SMM important?
- Enables originators (mortgage banking companies) to sell existing mortgages and thereby replenish funds with which new loans can be originated.
- Facilitates geographic flow of funds:
lenders located in the regions with a high demand for housing and mortgage financing sell mortgages to other intermediaries in regions with a surplus of savings. - Increases the investing options available to individuals and institutions:
provides a strong housing finance system and encourages home ownership
Major players of SMM:
- Major buyers: ? funds, life ? companies, other institutional investors with surplus of funds
- ??: Federal Housing Administration (FHA) default insurance and Veterans Affairs (VA) loan guarantees
- Protect mortgage buyers and investors from losses
- A new system of minimum underwriting standards to ensure borrower qualifications, building specifications.
Major players of SMM:
- Major buyers: Hedge funds, life insurance companies, other institutional investors with surplus of funds
- Government Programs: Federal Housing Administration (FHA) default insurance and Veterans Affairs (VA) loan guarantees
- Protect mortgage buyers and investors from losses
- A new system of minimum underwriting standards to ensure borrower qualifications, building specifications.
Development of SMM:
- 1954 Charter Act: Federal National Mortgage Association (FNMA), or “Fannie Mae”
- The changing role of FNMA over the years
> It transforms into a ? organization
> FNMA issues ?
In 2008, due to concerns about FNMA’s viability in light of the subprime mortgage crisis, Fannie Mae is placed under federal government control.
Development of SMM:
- 1954 Charter Act: Federal National Mortgage Association (FNMA), or “Fannie Mae”
- The changing role of FNMA over the years
> It transforms into a private organization
> FNMA issues securities
In 2008, due to concerns about FNMA’s viability in light of the subprime mortgage crisis, Fannie Mae is placed under federal government control.
Development of SMM (part 2):
HUD Act 1968: Government National Mortgage Association (GNMA), or “Ginnie Mae”
GNMA manages and liquidates FNMA loan portfolio
Special lending to support certain housing programs
Guarantee timely payment of principal and interest for mortgage-backed securities
This GNMA’s guarantee program
=> Eliminated any ?? in payments to investors.
This led to virtual explosion in secondary market and rise of “??” securities!
Development of SMM (part 2):
HUD Act 1968: Government National Mortgage Association (GNMA), or “Ginnie Mae”
GNMA manages and liquidates FNMA loan portfolio
Special lending to support certain housing programs
Guarantee timely payment of principal and interest for mortgage-backed securities
This GNMA’s guarantee program
Eliminated any default delay in payments to investors.
This led to virtual explosion in secondary market and rise of “pass-through” securities!
Development of SMM (Part 3):
A pass-through security is a ? e.g., ??? (MBSs) based on certain debt receivables from underlying assets, such as mortgages on homes, and providing the investor a right to a portion of those profits.
Investors are attracted to these securities because :
?? on them was minimized by ?? or a ? guarantee => Similar to investing in a ? security.
Added guaranteed of ?? of ? and ? by ?.
Development of SMM (Part 3)
A pass-through security is a derivative e.g., mortgage-backed securities (MBSs) based on certain debt receivables from underlying assets, such as mortgages on homes, and providing the investor a right to a portion of those profits.
Investors are attracted to these securities because :
Default risk on them was minimized by FHA insurance or a VA guarantee => Similar to investing in a government security.
Added guaranteed of timely payment of interest and principal by GNMA.
How Secondary Mortgage Market Operates?
Recall: Primary Function of SMM?
To provide a mechanism for replenishing funds used by mortgage originators. => ensure a flow of new mortgage originations!
How Secondary Mortgage Market Operates?
Recall: Primary Function of SMM?
To provide a mechanism for replenishing funds used by mortgage originators. => ensure a flow of new mortgage originations!
How Secondary Mortgage Market Operates? (part 2)
- ?? Programs:
- ? Commitment (originator and buyers are obligated to deliver and buy a certain amount of mortgages at a certain price)
- ? Delivery (gives the mortgage originator the “right but not obligation” to sell mortgages)
How Secondary Mortgage Market Operates? (part 2)
- Direct Sale Programs:
- Mandatory Commitment (originator and buyers are obligated to deliver and buy a certain amount of mortgages at a certain price)
- Optional Delivery (gives the mortgage originator the “right but not obligation” to sell mortgages)
How Secondary Mortgage Market Operates? (part 3)
2. through Mortgage-related ??:
=> Mortgage-backed security
How Secondary Mortgage Market Operates? (part 3)
2. through Mortgage-related security pools:
=> Mortgage-backed security (MBS)
https://images.app.goo.gl/1KMCuKF6suCuinpU8
Types of MBS:
1. ??? (MBBs):
Issuer retains ? of mortgages and pays ? to investors; mortgages held in trust with a third-party trustee
Similar to corporate bond, MBBs are usually issued with fixed coupon rate and specific maturity (e.g., 5-10%; 30-, 20- 15-year maturities)
- Over-collateralization
Mortgage loan balances ? par value of bonds issued,
Help to ensure ? payment to bondholders.
- ‘Mark to market’
IF the market value of mortgage pool < an agreed level, THEN the ? must replenish the pool with additional ?)
Types of MBS:
1. Mortgage-Backed Bonds (MBBs):
Issuer retains ownership of mortgages and pays interest to investors; mortgages held in trust with a third-party trustee
Similar to corporate bond, MBBs are usually issued with fixed coupon rate and specific maturity (e.g., 5-10%; 30-, 20- 15-year maturities)
Over collateralization
Mortgage loan balances > par value of bonds issued,
Help to ensure interest payment to bondholders.
‘Mark to market’
IF the market value of mortgage pool < an agreed level, THEN the issuer must replenish the pool with additional mortgages)
Types of MBS:
1. Mortgage-Backed Bonds (MBBs)
- Credit Rating (Moody’s, Fitch or S&P):
AAA, AA, A, BBB, BB, B, CCC, CC, C, and D
Mortgage Quality (Loan-to-value LTV ratio, guaranteed?)
Geographic ?
? rates on mortgages in the pool
Likelihood of mortgages ? before maturity
The extent of ??
Appraised value and debt coverage ratio, if commercial mortgages
Types of MBS:
1. Mortgage-Backed Bonds (MBBs)
- Credit Rating (Moody’s, Fitch or S&P):
AAA, AA, A, BBB, BB, B, CCC, CC, C, and D
Mortgage Quality (Loan-to-value LTV ratio, guaranteed?)
Geographic Diversification
Interest rates on mortgages in the pool
Likelihood of mortgages prepayment before maturity
The extent of over collateralization
Appraised value and debt coverage ratio, if commercial mortgages
Types of MBS:
Example 19-1: Mortgage Bond Valuation
20-year to maturity
Par value of $10,000
10.5% annual coupon.
At issue, bond market investors require an 11% interest rate.
a. What is the initial price of the bond?
b. what would be the price of the bond 5 years later if investors required a 12% return?
Types of MBS:
Example 19-1: Mortgage Bond Valuation
20-year to maturity
Par value of $10,000
10.5% annual coupon.
At issue, bond market investors require an 11% interest rate.
a. The initial price of the bond = $9,601.83 (priced at a discount)
b. Bond price 5 yrs later = $8,978.37 (priced at a discount)
Types of MBS:
MBB:
There is a inverse relationship between MBB prices and demanded rates of return.
Types of MBS:
MBB:
There is a inverse relationship between MBB prices and demanded rates of return.
Types of MBS:
Mortgage-Backed Bonds (MBBs):
- Zero-Coupon Bond:
The only cash flow to an investor is a lump sum at ?
No interim coupon payments
Also called “deep discount” bonds
Analysis is just computing the present value of a lump sum
Types of MBS:
Mortgage-Backed Bonds (MBBs):
- Zero-Coupon Bond:
The only cash flow to an investor is a lump sum at maturity
No interim coupon payments
Also called “deep discount” bonds
Analysis is just computing the present value of a lump sum
Types of MBS:
Mortgage ??? (MPTs)
In a mortgage-pass through security, thousands of mortgage loans are collected into a ?, known as mortgage pool. With this mortgage pool as a ?, ? are issued to the investors representing a share in the mortgage pool. As the name suggests, the cash flow from the mortgage pool is simply passed on to the investors on a prorate basis.
GNMA’s guarantee for a ? and ? payment of principal and interest for mortgage-backed securities
Types of MBS:
Mortgage Pass-Through Securities (MPTs)
In a mortgage-pass through security, thousands of mortgage loans are collected into a pool, known as mortgage pool. With this mortgage pool as a collateral, securities are issued to the investors representing a share in the mortgage pool. As the name suggests, the cash flow from the mortgage pool is simply passed on to the investors on a prorate basis.
GNMA’s guarantee for a full and timely payment of principal and interest for mortgage-backed securities
