Institutions that originate loans (primary mortgage market) and the markets in which they are transferred (secondary mortgage market)
The mortgage markets are made up of:
Primary mortgage market
The market in which mortgage originators provide loans to borrowers
Secondary mortgage market
Channels liquidity into the primary market by purchasing loans from the lenders
Commercial banks, thrifts, mortgage bankers, credit unions, and others
Primary mortgage market lenders include
Residential mortgage lenders (loan originators)
Are part of the primary mortgage market. They originate and fund loans to borrowers
Mortgage banker
A direct lender that lends its own money, whose principal business is the origination and funding of loans secured by real property
Mortgage broker
Originates loans with the intention of brokering them to lending institutions
Loan originators
Both mortgage bankers and mortgage brokers are _________ who take residential mortgage loan applications and offer or negotiate terms of a residential mortgage loan for compensation or gain
Governmental (Ginnie Mae), quasi-governmental (Fannie Mae, Freddie Mac), and private entities such as investment banks
The principal secondary mortgage market issuers are:
Stock brokerage firms
The Securities and Exchange Commission (SEC) licenses _______ to buy and sell securities for clients and for their own accounts
Investment banks
Help issuers take new bond issues to market, usually by acting as the intermediary between the issuer and investors
Mortgage-backed securities (MBS) or mortgage-related securities (MRS)
The investment that is bought and sold in the secondary mortgage market is an asset called a _______. Are debt issues collateralized by the mortgages
Mortgage pools
Issuers purchase existing mortgages with funds they have acquired by issuing bonds or other types of debt instruments. Through securitization, the mortgages they buy are formed into _____ and used as security for those debt instruments. A group of mortgag
Debt instruments
Are known as mortgage-backed securities, are collateralized by the mortgage pool
Primary mortgage market
The market in which lenders originate real estate loans directly to borrowers. Participants include commercial banks, thrifts, mortgage companies, and other financial intermediaries
Primary mortgage market
These institutions provide money to qualified borrowers. The borrower is seeking financing in order to make a purchase or to refinance an existing loan. Lenders help consumers by identifying the appropriate loan for the borrower, helping to complete the l
Points, or discount points
Are calculated as a percentage of the loan amount
Loan origination fees or funding fees
Typically one or two points of the amount of the loan
Mortgage yield
The income the lender derives, the amount received or returned from real estate loan portfolios expressed as a percentage
Loan servicer
Collects payments from borrowers, subtracts fees, and sends the balance of the money to investors who own the loans. In charge of collecting payments, handling escrows for taxes and insurance, making payments to the mortgage investor, and administering a
Secondary Mortgage Market
A resale marketplace for loans, in which existing loans are bought and sold
I'll be gone, you'll be gone" (IBGYBG)
Referred to the attitude of the players in this money machine�borrowers, originators, securitizers, and rating agencies. They did not care if the loans ultimately went bad because by the time they did, the loans were in the hands of unwitting investors
Securitization
the pooling and repackaging of cash flow that turns financial assets into securities that are then sold to investors. Any asset that has a cash flow can be ______
Mortgage-backed security
A type of asset-backed security that is protected by a collection of mortgages. The mortgages are pooled and secured against the issue of bonds
Pass-through securities and collateralized-mortgage obligations
The two most common types of mortgage-backed securities are:
Pass-through securities or participation certificate
Represents direct ownership in a pool of mortgages. They are called pass-throughs because the principal and interest of the underlying loans are passed directly through to investors. Each investor owns a pro-rata share of all principal and interest paymen
Collateralized mortgage obligation (CMO)
A type of MBS in which the mortgages are put into separate pools with varying degrees of risk and maturities (tranches)
Tranche
A part or segment of a structured security. A security may have more than one _____, each with different risks and maturities
Stripped mortgage-backed security (SMBS
A type of CMO in which the interest and principal of the mortgage are separated into principal-only and interest-only bonds
Principal-only stripped mortgage-backed security (PO)
A bond with cash flows that are backed by the principal repayment component of a property owner's mortgage payments. Because principal-only bonds sell at a discount, they are zero coupon bonds
Zero coupon bond
A bond that pays no coupons, is sold at a deep discount to its face value, and matures to its face value. These bonds satisfy investors who are worried that mortgage prepayments might force them to re-invest their money when interest rates are lower
Interest-only stripped mortgage-backed security (IO)
A bond with cash flows that are backed by the interest component of the property owner's mortgage payments. IO bonds change in value based on interest rate movements
Default risk
The borrower's inability to meet interest payment obligations on time. Lenders pool mortgages by their interest rate and date of maturity. Additionally, mortgages are pooled by the initial credit quality of the borrower
Prime, Alt-A, and subprime loans
Pools are comprised of:
Prime
Conforming mortgages, prime borrowers, full documentation (such as verification of income and assets), and strong credit scores
Alt-A
Non-conforming mortgage (such as vacation home), generally prime borrowers, less documentation
Subprime
Non-conforming mortgage, borrowers with weaker credit scores, and no documentation
Guarantee against the risk of borrower default
Some MBS issuers, such as Fannie Mae, Freddie Mac, and Ginnie Mae, guarantee against the risk of borrower default. Ginnie Mae MBS are backed with the full faith and credit of the U.S. Federal government. Fannie Mae and Freddie Mac use lines of credit with
(1) the Federal National Mortgage Association (Fannie Mae), (2) the Federal Home Loan Mortgage Corporation (Freddie Mac), and (3) the Government National Mortgage Association (Ginnie Mae)
There are three major participants in the secondary mortgage market:
Fannie Mae and Freddie Mac
Both Fannie Mae and Freddie Mac are congressionally chartered, shareholder-owned corporations commonly known as government-sponsored enterprises (GSEs). Fannie Mae and Freddie Mac are considered government-sponsored because Congress authorized their creat
Ginnie Mae
A government-owned corporation within the Department of Housing and Urban Development (HUD) and operates under different regulations
Government-sponsored enterprises (GSEs)
Financial services corporations created by the United States Congress. Their purpose is to increase the availability and reduce the cost of credit to the residential finance, agriculture, and education sectors of the economy. The GSEs that deal with resid
Federal Housing Finance Agency (FHFA)
An independent agency that was established by the Federal Housing Finance Reform Act of 2007 to regulate the GSEs. Their mission is to ensure that Fannie Mae and Freddie Mac are adequately capitalized and that their businesses operate in a financially sou
Federal Home Loan Mortgage Corporation (Freddie Mac)
A stockholder-owned corporation charted by Congress in 1970 to stabilize the mortgage markets and support homeownership and affordable rental housing. Its mission is to provide liquidity, stability, and affordability by providing secondary mortgage suppor
Federal National Mortgage Association
Was created by Congress in 1938 to bolster the housing industry in the aftermath of the Great Depression. It does not lend money directly to home buyers. Initially, it was authorized to buy and sell FHA-insured loans from lenders, but VA-guaranteed loans
Government National Mortgage Association (Ginnie Mae)
government-owned corporation within the Department of Housing and Urban Development (HUD). Ginnie Mae was created in 1968 when the Federal National Mortgage Association was split into Fannie Mae and Ginnie Mae. Fannie Mae's focus is to support the seconda
Approved issuers
Lenders that meet specific requirements and are approved to issue Ginnie Mae MBS. Acquire or originate eligible FHA and VA loans. The loans are pooled and securitized into MBS, which are then guaranteed by Ginnie Mae