chapter 23 – mortgage backed securities ba 543 financial markets and institutions
TRANSCRIPT
Chapter 23 – Mortgage Backed Securities
BA 543 Financial Markets and Institutions
Chapter 23 – Mortgage Backed
History and Background of Mortgage Market Savings and Loan
Received Deposits from Saver Loan Saver’s Deposit out to Home-Buyer Saver Received 5% on investment Borrower paid 8% on loan 3% difference was the spread that covered the
management fees and profit of the transaction
Different Loan Rates Across the Country
Chapter 23 – Mortgage Backed
Government Promotes Fixed Rate Mortgages Government Agencies
Federal Housing Authority (FHA) Originate and underwrite conforming loans
Federal National Mortgage Association (Fannie Mae)
Secondary Market for trading mortgages Trade Insured – standardized mortgages Granted credit line with Treasury for “squeezes” Trouble developing the secondary market
Chapter 23 – Mortgage Backed
Government Agencies Continued Government National Mortgage Association –
Ginnie Mae Created to support the FHA and VA mortgage
markets Full Faith and Credit of the Government
Added Federal Home Loan Mortgage Association – Freddie Mac
Divided up the functions Fannie Mae – Conventional Loans Freddie Mac – Insured FHA and VA Loans
Chapter 23 – Mortgage Backed
Mortgage Pass-Through Securities Loans meet “standards” – Conforming Loans Loan stamped with GNMA or FNMA or FHLMA Bundled in a Pool Cash Flows of Pool pledged against Issued
Securities Example of Pass-Through Transaction
Players: Home Buyers, Bank (Service Loan), Government Agency, and Capital Markets
Chapter 23 – Mortgage Backed
Tranches Developed Tranche A interest and all Principal Tranche B interest as you go and second in
line for principal once Tranche A is retired Tranche C interest as you go and third in line
for principal once Tranche B is retired Etc. Tranche Z last tranche. Foregoes interest and
principal until all other Tranches are retired Numerical Example….
Chapter 23 – Mortgage Backed
Other Players in Mortgage Backed Non Agency Securities
Government “wanted” to privatize the market Needed to strengthen the secondary market Privatize their agencies Tax issues
Other Developments Sequential CMOs – example Stripping CMOs Commercial CMOs