UGBA 180 Lecture Notes - Lecture 14: Bond Credit Rating, Private Label, Fannie Mae
25 Jun 2018
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Lecture 14
The Secondary Mortgage Market
Background
●Secondary market plays a huge role in shaping dynamics of the US mortgage market
○Has direct implications for credit availability and interest rates
○To understand securitization can help parse the origins of the 2008 financial crisis
Primary Mortgage Market
●Market where lenders extend loans to borrowers to purchase a house
●Participants
○Borrowers
○Lenders insurance providers
○Servicers
●Lenders
○Banks
○Credit unions
○Finance companies
●Most common type of mortgage: 30 year , fixed rate, fully amortizing mortgage
●Lender protection
○Underlying property serves as collateral
■Down payments increase probability of recouping the value of the loan,
and protect against decreases in home prices
○Mortgage insurance
■Compensates lender in event of borrower default
■Purchased from private mortgage insurers PMI or the federal government
●Government mortgage mortgage insurance
○Federal housing administration FHA
■Mortgages below a certain size
■Repays lender entire remaining principal in case of default
■Largest provider of government mortgage insurance
○Department of veterans affairs VA
■Guarantees mortgages made to veterans
■Repays portion of remaining principal in case of default
○US Department of Agriculture
■Loan guarantees program for low and moderate income borrowers in rural
areas
■Repays portion of remaining principal in case of default
●Mortgage servicing
○After origination, lenders typically do not administer the loan
find more resources at oneclass.com
find more resources at oneclass.com
○Mortgage servicers serve as intermediary between lenders and borrowers
■Collect monthly payments from borrowers
■Forward to lenders
■Receive monthly fee
■Responsible for negotiating workout plan in case of delinquency
●Mortgage classifications
○Government insured vs conventional mortgages
○Prime vs non-prime mortgages
○Conforming vs nonconforming mortgages
■Conforming = eligible to be purchased by GSEs
■Conforming loans must satisfy minimum credit score and maximum loan
amount limits
○With nonconforming:
■Jumbo loans
■Alt-A loans
■Subprime
Secondary Mortgage Market and Securitization
●Market where mortgages can be sold after origination
●After making a loan an lender can:
○Hold the mortgage on its portfolio
○Sell it to another entity on the secondary market
●Why does this exist?
○Proceeds from selling mortgages on the secondary market provide funding for
new mortgages in the primary market
●Participants in the Secondary Market
○Lenders: originate mortgages in the primary market, then sell them to new owners
○Services: continue to intermediate between mortgage owner and borrower
○Buyers: purchase mortgages from the original lenders and either hold them as
whole loans or securitize them to form a mortgage backed security MBS
■Government sponsored enterprises GSEs
○Investors: purchase pieces of the MBS
■Doesn’t own underlying mortgage but receive future stream of payments
coming from the mortgage
■Pension funds
■Hedge funds
■Domestic and foreign banks
●Securitization
○Financial institution buys and pools together many different mortgages
○Generates a security which produces future stream of payments based on monthly
payments from underlying mortgages
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Secondary market plays a huge role in shaping dynamics of the us mortgage market. Has direct implications for credit availability and interest rates. To understand securitization can help parse the origins of the 2008 financial crisis. Market where lenders extend loans to borrowers to purchase a house. Most common type of mortgage: 30 year , fixed rate, fully amortizing mortgage. Down payments increase probability of recouping the value of the loan, and protect against decreases in home prices. Compensates lender in event of borrower default. Purchased from private mortgage insurers pmi or the federal government. Repays lender entire remaining principal in case of default. Loan guarantees program for low and moderate income borrowers in rural areas. Repays portion of remaining principal in case of default. After origination, lenders typically do not administer the loan. Mortgage servicers serve as intermediary between lenders and borrowers. Responsible for negotiating workout plan in case of delinquency. Conforming = eligible to be purchased by gses.
