Creating the Secondary Mortgage Market Players and History

Creating the Secondary Mortgage Market: Players and History Erica Liu

Secondary Mortgage Market �The market for the sale of securities or bonds collateralized by the value of mortgage loans �Ensure liquidity in the market �Redistribute funds across the nation

National Housing Act of 1934 �Franklin Roosevelt’s New Deal �Relief, Recovery, and Reform after Great Depression �Make housing and home mortgages more affordable �Protect lenders from the risk of default

Federal Housing Administration �Assist in the construction, acquisition, and/or rehabilitation of residential properties �Regulate rate of interest and terms of mortgages �Insure mortgages �Increase the number of people who can afford down payment and monthly mortgage payments �Increase the size of market for single family homes

Federal National Mortgage Association � 1938 – Founded as a government agency �Establish a secondary mortgage market �Bought FHA insured loans from private lenders �Lenders more inclined to extend mortgage credit �Equalize supply and demand of funds in capital rich and capital poor areas

World War II � 1944 - Servicemen's Readjustment Act (GI "Bill of Rights”) � 1949 – Fannie Mae authorized to purchase mortgages insured by the Veteran’s Administration

VA Home Loan Program �End of WW II, troops returned home from overseas �Increased demand for housing and financing �Designed to help members of the U. S. armed forces readjust to civilian life after war �Federally guaranteed home loans to help veterans buy houses and reestablish good credit

Housing and Urban Development Act of 1968 �Fannie Mae becomes a government sponsored enterprise (GSE) �sold to private shareholders �Fannie Mae split into two organizations

Government National Mortgage Association �Government-owned corporation within the Department of Housing and Urban Development �Securitize loans insured by the FHA and VA �Government maintains control over secondary market for federally insured mortgages

Mortgage Backed Securities �Agency pass through securities �Issued by approved lenders �Agency guarantees timely payment � Ginnie Mae - only MBS to carry the “full faith and credit guaranty” of the United States government

Federal Home Loan Mortgage Corporation � 1970 - Emergency Home Finance Act �Publicly owned GSE �Expand secondary mortgage market and eliminate perceived monopoly of Fannie Mae

Role of GSE’s � 1972 – Fannie Mae and Freddie Mac began purchasing “conventional” mortgages �Mortgages not guaranteed by FHA or VA �Loans required insurance from new Private Mortgage Insurance companies �Can buy or sell any type of residential mortgage �Mortgages packaged into securities are restricted to government loans and those that satisfy underwriting guidelines (conforming conventional loans)

What’s The Difference? �GSE’s purchase mortgages �Freddie Mac - purchase loans from savings and loan associations �Fannie Mae -focused on banks and other mortgage finance companies �Ginnie Mae only issues guarantee

Sources � http: //www. ginniemae. gov/about/history. asp? Section=About � http: //www. fundinguniverse. com/company-histories/Fannie-Mae-Company. History. html � http: //www. cbo. gov/ftpdocs/120 xx/doc 12032/12 -23 -Fannie. Freddie. pdf � http: //www. encyclopedia. com/topic/Federal_National_Mortgage_Association. aspx � http: //www. referenceforbusiness. com/history 2/27/Freddie-Mac. html � http: //www. themonticellogroup. com/American_Mortgage_Market. pdf � http: //www. va-home-loans. com/history_VA_loan. htm

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