17 - Secondary Mortgage Market - ch. 19, 20

ucla | MGMT 170 | 2023-05-31T10:53

Table of Contents

Supplemental

  • FDIC (federal deposit insurance corporation) insures up to $250k in a single account

Lecture

  • fannie mae (NYSE:FNMA) and freddie mac (NYSE:FMCC)
    • fannie mae - federal national mortgage association, created 1938, privatized 1968
    • freddie mac - federal home loan mortgage corporation, created by Emergency Home Finance Act of 1970, largest buyers of home loans in the US
    • HUGE companies together owning 50% of residential home loans and $7 trillion in loans and securities
    • during 2007-8 crisis, they nearly went bankrupt and were placed in conservatorship of the Federal Housing Finance Agency (FHFA - housing an economic recovery act of 2008)
  • ginnie mae
    • Government National Mortgagge Associate (HUD act of 1968)
    • US govt corp within Department of Housing and Urban Development (HUD)
    • ginnie mae guarantees mortgage backed securities
  • conforming loans
    • mortgage loans that conform to fannie mae and freddie mac underwriting guidelines for:
    • loan size, creditworthiness (FICO), DSCR, LTV, and others
  • non-conforming loans
    • mortgage loans that don’t conform to the previous guidelines - at a time
  • subprime loans
    • mortgages that fall BELOW the underwriting guidelines of fannie mae and freddie mac
    • in FICO, DSCR, LTV
    • NOT considering loan size
  • seasoned mortgages
    • mortgages that have been paying monthly principal and interest on time
    • longer the payments stay current, the more seasoned it is
  • RMBS and CMBS
    • residential mortgage backed securities and commerical mortgage backed secuirities
    • created when pools of resi or comm mortgages are tranched into securities for sale to investors in the capital markets
    • primary riskss are dfault risk and prepayment risk
  • default risk
    • when default rate on the mortgages in the traunch of a MBS is higher than projected at time of MBS offering
  • prepayment risk
    • when prepayment rate on the mortgages in the traunch of a MBS is higher than projected at time of MBS offering
  • CMOs
    • collateralized mortgage obligations
    • debt securities issued using a pool of mortgage loanss as collateral
    • issuer retains ownership of the loans
  • CDOs
    • collateralized debt obligations
    • any debt can be collateral for the securities
  • POs, IOs, and floaters and inverse floaters
    • principal only tranches, interest only traunches, and tranches tied to an index like LIBOR
    • unqiue securitiess creaated to appeal to different investors

Discussion

Resources

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