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TX REAL ESTATE FINANCE > LESSON 4: SECONDARY MORTGAGE MARKET > Flashcards

LESSON 4: SECONDARY MORTGAGE MARKET Flashcards

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3
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How was financing for real estate historically related to savings in Banks and S&Ls?

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Financing for real estate was closely tied to the amount of money saved in Banks and Savings and Loan associations (S&Ls). If people didn’t save money, loans would be in short supply.

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4
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How did home financing change in the 1980s?

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In the 1980s, home financing became linked to Wall Street through the Secondary Mortgage Market, providing unlimited funds. However, interest rates would need to compete with other financial instruments on the open market.

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5
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What is the secondary mortgage market?

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The secondary mortgage market is where mortgages created in the primary mortgage market are bought and sold. It ensures funds are available in areas with low savings rates and high housing demand.

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6
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What can mortgage companies sell in the secondary mortgage market?

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Mortgage companies can sell the loan, the servicing rights, or both. If just the loan is sold, the original lender collects payments. If the servicing rights are sold, the company collecting payments changes but the terms stay the same.

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7
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How are loans and servicing usually sold in the secondary mortgage market?

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Loans and/or servicing are usually sold in large pools of $1,000,000 or more.

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8
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What are the primary players in the secondary mortgage market?

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Mortgage originators, mortgage aggregators, securities dealers/brokers, and investors.

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9
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How large is the secondary mortgage market?

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The secondary mortgage market is extremely large and liquid, making credit equally available to borrowers across different geographical locations.

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10
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How does the size of the secondary mortgage market compare to government-issued Treasury Bills?

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The total dollar value of the secondary mortgage market now exceeds the total dollar value of government-issued Treasury Bills, Notes, and Bonds.

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11
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What are Mortgage-Backed Securities (MBS)?

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MBS are securities backed by mortgages issued by commercial banks, brokerage houses, and large mortgage companies. These securities provide funds for mortgages that may not meet the underwriting guidelines of Fannie Mae and Freddie Mac.

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12
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What are jumbo loans?

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Jumbo loans are loans for homes that exceed the limits set by Fannie Mae (FNMA) and Freddie Mac. They typically meet the same credit and income guidelines but are larger in size.

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13
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What are Alt-A loans?

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Alt-A loans are alternative income loans where the borrower’s income or employment is not verified. These can include stated income, no-ratio, or no-doc loans.

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14
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What are sub-prime loans?

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Sub-prime loans are high-risk loans offered to borrowers with poor or no credit. These loans have higher interest rates based on the degree of bad credit.

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15
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What types of properties are ineligible for FNMA financing?

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Properties like vacation condominiums, gentleman farms, mixed-use properties, and large acreages may be ineligible for FNMA financing.

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16
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Who buys Mortgage-Backed Securities (MBS)?

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MBS are sold to investors such as pension funds, insurance companies, banks, foreign governments, and individual investors.

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17
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What are the warranties regarding MBS loans?

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The issuer of MBS includes guarantees about the quality and credit standards of the loans, such as minimum credit scores, maximum loan size, and property type.

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18
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How do interest rates on MBS vary?

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Interest rates on MBS vary based on the credit quality of the loans used as collateral. Loans with higher risk (e.g., low credit scores) will have higher interest rates.

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19
Q

What is the primary mortgage market?

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The primary mortgage market is where consumers apply for and obtain mortgage loans.

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20
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What is the role of the secondary mortgage market?

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The secondary mortgage market allows loans to be bought and sold to free up funds for lenders to make more loans.

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21
Q

What is the primary purpose of Fannie Mae (FNMA)?

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Fannie Mae was created in 1938 to provide a secondary market for residential mortgages and stabilize mortgage markets. It buys packages of loans from local lenders and sells mortgages to investors. It initially handled housing assistance programs and first-mortgage management.

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22
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What significant change occurred to Fannie Mae in 1968?

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In 1968, an Act of Congress transformed Fannie Mae into a private corporation with a public purpose. It became a profit-making organization listed on the New York Stock Exchange and is no longer a federal agency. It operates under the conservatorship of the Federal Housing Finance Agency (FHFA).

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23
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Is Fannie Mae a federal agency?

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No, Fannie Mae is not a federal agency. It is a government-sponsored enterprise (GSE) under the conservatorship of the Federal Housing Finance Agency (FHFA).

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24
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What types of mortgages does Fannie Mae purchase?

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Fannie Mae regularly buys mortgages from primary lending institutions, including conventional mortgages, which are a major portion of its business.

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25
How does Fannie Mae support investors?
Fannie Mae sells interest-bearing securities backed by specific pools of mortgages it holds to investors. It also sells stock to private investors.
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What is the current loan size limit for Fannie Mae?
The current loan size limit for Fannie Mae is $510,400 for single-family homes. Larger loans are referred to as "Jumbo Loans." The limits are higher in high-cost areas like California and Hawaii and for multi-unit properties.
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What is the Loan to Value (LTV) requirement for Fannie Mae?
Fannie Mae requires a minimum down payment based on LTV and Combined Loan to Value (CLTV) limits. If the loan is for more than 80% of the purchase price, mortgage insurance is required.
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What are some additional requirements for investment properties?
Rates and/or fees for investment or non-owner occupied homes are typically higher.
29
What are the minimum standards for condominium projects under Fannie Mae?
Fannie Mae requires standards for condo projects such as: owner-occupied ratio, number of units owned by the same person, completed and functioning amenities, no commercial space, no Condotels, and control of common areas by the homeowner's association for at least one year.
30
What are the minimum income requirements for Fannie Mae?
Borrowers must have sufficient income to cover housing expenses and other monthly obligations.
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How does Fannie Mae evaluate credit quality?
Fannie Mae evaluates credit quality using credit scores, debt obligations, and factors like bankruptcies, judgments, collections, and pending lawsuits.
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What is required for the source of funds for down payments?
Borrowers must generally provide part or all of the down payment from their own funds, though gifts, sale of assets, and other loans are considered.
33
How does Fannie Mae determine the market value of a property?
Fannie Mae uses an appraisal to establish the market value of the property, and the appraisal notes deficiencies and whether the property meets FNMA's minimum standards.
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What is Fannie Mae’s role in the secondary mortgage market?
Fannie Mae is the largest provider of conventional loans and sets underwriting guidelines that are generally adopted as industry standards. These loans may be eligible to be sold to Fannie Mae.
35
What is Desktop Underwriting (DU)?
Desktop Underwriting (DU) is Fannie Mae's electronic underwriting program used to assess loan eligibility.
36
What is Ginnie Mae's primary focus?
Ginnie Mae focuses on government loans, including FHA, VA, and USDA loans, by providing a full-faith-and-credit guarantee on securities backed by these loans.
37
How does Ginnie Mae differ from Fannie Mae?
Unlike Fannie Mae, which deals with conventional loans, Ginnie Mae guarantees bonds backed by government loans such as FHA, VA, and USDA loans. Ginnie Mae is a government agency, while Fannie Mae is a private corporation.
38
What is the role of Ginnie Mae in the secondary mortgage market?
Ginnie Mae insures bonds backed by government-backed loans, reducing risk for investors and broadening the market for these securities. It guarantees the bonds for a fee but does not own them.
39
What is the government’s role with Ginnie Mae's bonds?
Ginnie Mae-insured bonds have the explicit backing of the federal government. If loans default and FHA or VA insurance does not cover the full amount, Ginnie Mae makes up the difference.
40
What is the Federal Home Loan Bank Act of 1932?
The Federal Home Loan Bank Act of 1932 extended $125 million in credit to savings and loan institutions and created the Federal Home Loan Bank System with 12 regional banks.
41
What did the Home Owners Loan Act of 1933 do?
The Home Owners Loan Act gave savings and loans the ability to be chartered by the federal government, allowing them to offer emergency relief for homeowners to refinance their home loans for 20 years.
42
What is Freddie Mac's role in the U.S. housing market?
Freddie Mac operates in the U.S. secondary mortgage market, buying loans that meet its standards from approved lenders, providing liquidity, and shifting a significant portion of the credit risk to private investors.
43
What is Freddie Mac's mission?
Freddie Mac's mission is to provide liquidity, stability, and affordability to the housing market while focusing on affordable, safe, sustainable, and equitable housing.
44
What significant loan product was created in 1936?
The first fixed-rate, amortized loan was created in 1936, allowing borrowers to receive amortized loans with rates as low as 5% and an 80% loan-to-value (LTV).
45
What is the role of the Federal Home Loan Mortgage Corporation (Freddie Mac)?
Freddie Mac was created in 1970 to establish a reliable secondary market for the sale of conventional mortgages by savings and loans, and it now operates as a government-sponsored enterprise, not a federal agency.
46
What are mortgage-participation certificates (PCs) and guaranteed-mortgage certificates (GMCs)?
PCs and GMCs are securities that represent an undivided interest in specific pools of mortgages, with Freddie Mac guaranteeing payment of principal and interest to purchasers.
47
What is the underwriting system used by Freddie Mac?
Freddie Mac uses an electronic underwriting system called "Loan Prospector."
48
What is Farmer Mac's mission?
Farmer Mac was created to increase access to and reduce the cost of capital for American agriculture and rural communities by providing financial solutions to agricultural lenders, agribusinesses, and rural institutions.
49
What kind of solutions does Farmer Mac provide?
Farmer Mac offers a range of financial solutions including low-cost financing, risk management tools, and flexible loan products to support agricultural lenders and rural borrowers.
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How does Farmer Mac work with lenders?
Lenders apply to be Approved Lenders under Farmer Mac, and Farmer Mac purchases loans and loan participations secured by first lien mortgages on eligible agricultural or rural utility assets.
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What are the key features of Farmer Mac's loan products?
Farmer Mac provides access to low-cost funds, competitive rates, favorable loan terms, and a full suite of products, including long-term fixed-rate loans and revolving lines of credit.
52
How does Farmer Mac operate?
Farmer Mac operates similarly to Fannie Mae and Freddie Mac, as a stockholder-owned and federally chartered entity. It was created by the Agricultural Credit Act of 1987 and its statutory authority has been amended three times to streamline operations, clarify regulatory oversight, and create the Farmer Mac II program.
53
What was the purpose of the 1996 amendment to Farmer Mac's statutory authority?
The 1996 amendment streamlined Farmer Mac’s operations, allowing it to buy loans directly from lenders, issue guaranteed securities representing 100% of the principal of the purchased loans, and modify capital requirements.
54
What did the 1991 amendment to Farmer Mac's statutory authority accomplish?
The 1991 amendment clarified Farmer Mac's authority to purchase its guaranteed securities, established the Farm Credit Administration's Office of Secondary Market Oversight as Farmer Mac's financial regulator, and set minimum regulatory capital requirements for Farmer Mac.
55
What was the purpose of the 1990 amendment to Farmer Mac's statutory authority?
The 1990 amendment created the Farmer Mac II program at the request of the USDA to further support rural and agricultural financing.
56
What are USDA loans?
USDA loans are available to low and moderate-income families in rural areas. The program provides financing for single-family homes, apartments, and multi-family units, and has income limits of 115% of the median income for the area.
57
What other services does the USDA provide through the Farm Service Agency (FSA)?
The USDA, through the FSA, provides direct and guaranteed loans to beginning farmers and ranchers who cannot obtain commercial financing. These loans can be used to purchase land, livestock, equipment, and make farm improvements.
58
What is a Real Estate Mortgage Investment Conduit (REMIC)?
A REMIC is an entity that holds pools of mortgages and mortgage-backed securities, with cash flows allocated to individual investors and bondholders. It is a multi-class mortgage-backed security where cash flows are distributed based on various classes such as maturity, type, and interest rate.
59
How are REMICs structured and taxed?
REMICs are structured with varying rates of return based on maturity and risk, and are treated like a partnership for Federal Income Tax purposes, with income passed directly to the investors.
60
What is the relationship between REMICs and CMOs?
REMICs are sometimes referred to as Collateralized Mortgage Obligations (CMOs). Both involve structuring mortgage-backed securities into different classes, but REMICs offer greater flexibility in structuring bond classes.
61
When did Freddie Mac begin issuing REMICs?
Freddie Mac began issuing REMICs in March 1988 and issued the first REMIC backed by Gold PCs in October 1990.
62
What is the significance of Gold PCs in Freddie Mac’s REMICs?
Gold PCs are the cornerstone product of Freddie Mac's mortgage-backed securities program. They are highly valued by fixed-income investors for their quality and liquidity, and they form the basis of REMIC products.
63
What should investors consider before investing in a REMIC?
Investors should consult with their attorney to ensure they are operating legally and correctly before investing in a REMIC.

TX REAL ESTATE FINANCE (10 decks)

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