Mortgage securities are crucial when it comes to the availability and cost of housing in the United States. This paper will analyze the mortgage securities market, and how the market functions. It will also focus on the subprime mortgages created from 2000 to 2006. Suggestions will be presented that would protect against the types of problems experienced in the mortgage securities market from 2006 through 2009.
Mortgage securities are considered an ownership interest in mortgage loans made by mortgage companies, commercial banks and other private entities to finance the borrower purchase home or other property. Mortgage securities were created when the servicers pool loans for sale to investors. The investors receive payments of principal and interest when mortgage loans are paid off by homeowners.
Investors in the secondary market often purchase mortgage securities after they are issued. Large institutions make investments in mortgage securities when they are issues. Other dealers in a secondary market sometimes redistribute securities.
Mortgage securities are issued by the Government National Mortgage Association (Ginnie Mae), or by government-sponsored enterprises (GSEs) such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (Freddie Mac, 2002).
Mortgage securities are often priced at a higher yield that corporate or Treasury bonds. The opportunities for profit are also greater. Mortgage
Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.
Rep. Barney Frank (D-MA) explains the old system of lending and the new securitization process. Matt Demon narrates how the home buyers repaid their loans to lenders, and consequently, the lenders sold the loans to the investment banks which combined the mortgage loans with other credit loans creating a collateral debt obligation a complex derivative. The collateral debt obligation sold to investors who paid the rating agency to evaluate the CDO's. The home buyers were now paying investors through this
The secondary mortgage market was on the up-rise when Michael Lewis accepted a job at Salomon Brother’s. The secondary mortgage market was the selling of bonds, with a promise to be paid back with mortgage loans. The lender, whomever that
"The Wall Street Journal" found that the current bond yields were 0.20. These bonds are issued by the US government. In view of the fact that Fannie Mae Securities is a mortgage-backed securities issued by FNMA. We have observed that Fannie Mae and Treasury yields are somewhat different because FNMA Personal Securities and Treasury bonds are issued by the US government. Therefore, we note that there should be some difference between the two rates. As a result, Fannie Mae gets money from investors and financial institutions and sells their mortgages.
The flow of funds within financial markets is stimulated by the money, bond and mortgage markets. A money market is the trading of highly liquid financial instruments with a duration of one year or less and includes the trading of Treasury bills. Furthermore, bonds are long term investments, with a duration greater than 1 year and are issued by corporations and the U.S. government. In addition, the mortgage market creates loans to finance the real estate market. Once mortgages are issued on a property, banking institutions securitize the mortgages and sell them on the secondary market (CSU Global, 2016). Due to the scale of these three markets they have an extensive impact on the monetary supply and economy.
Real estate finance in the modern community is changing the perspective of modern lending and purchases. It is a means to contemporary community’s ability to develop a foundation for discussing the nature and means of public spending and purchase. As a self-government sponsored agency, Federal National Mortgage Association (FNMA) also known as Fannie Mae works with the ultimate responsibility of lending and buying secondary mortgages in the market (Oesterle, 2010). It helps in the conservation of interest rates in the real estate business in the contemporary community. There is also the need for focusing on the impacts of the Fannie Mae on real estate finance. The approach of the Fannie Mae helps lenders to use the money gained from the secondary
Fannie and Freddie remain two of the largest financial institutions in the world, responsible for a combined $5 trillion in mortgage assets. The primary function of Fannie Mae and Freddie Mac is to provide liquidity to the nation’s mortgage finance system. Fannie and Freddie purchase home loans made by private firms (provided the loans meet strict size, credit, and underwriting standards), package those loans into mortgage-backed securities, and guarantee the timely payment of principal and interest on those securities to outside investors. Fannie and Freddie also hold some home loans and mortgage securities in their own investment portfolios.
Fannie Mae and Freddie Mac are government sponsored enterprises (GSE) that purchase mortgages, buy and sell mortgage-backed securities (MBS), and guarantee nearly half of the mortgages in the U.S. A variety of political and competitive pressures resulted in the GSEs ramping up their purchase and guarantee of risky mortgages in 2005 and 2006, just as the housing market was peaking.[258][259] Fannie and Freddie were both under political pressure to expand purchases of higher-risk affordable housing mortgage types, and under significant competitive pressure from large investment banks and mortgage
A city that is known for its diverse culture, up and coming neighborhoods, and eye-catching building designs, should believe to have everything. In the city of Key Biscayne, a place that caters to the public that incorporates physical activities into their lives, and has a way to enjoy doing it at the same time is nonexistent. If inspirations that come from past designers, one specifically who has unique design characteristics, architectural landmarks, built to give visual opinions, and surrounding elements, that may be viewed various ways, is combined, it should transform into a design that can capture the traits and ideas of each aspect. By adapting to existing structure, and reinventing its design, it will allow recreating a vision and
Mortgage-backed securities were bonds that were secured by home and other real estate loans. They were created when a number of these loans, usually with similar characteristics, were pooled together. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities, which derive their value from mortgage payments and housing prices, greatly increased (Subprime mortgage crisis). Pools of loans were sold to federal government agencies like Ginnie Mae or a government sponsored-enterprise such as Fannie Mae or Freddie Mac. Securitization was the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A typical example of securitization
This corporation was created not only to enhance the competition in the secondary mortgage market (Acharya, Richardson et al. 2011), but also to securitize mortgages, as Dodd (2007) mentions. The process of pooling mortgages and selling mortgage-backed securities (MBS) was developed, initially, by Ginnie Mae to reduce debt from the federal budget; the concept of securitization is discussed analytically later. The following years, MBS and securitization assisted GSEs to provide long-term funding in the US secondary mortgage market eliminating liquidity risk from originators while bearing both the credit and the interest rate risk (Dodd, 2007, Wall et al., 2005). The securitization could obliterate the interest rate risk from housing enterprises, as
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Figure 1 shows the “Outstanding First-Lien Residential Mortgage Debt” in all sectors as of 2007. The “Agency Mortgage Backed Securities” represent the high credit, low loan-to-value, “safe” loans administered by governmental agencies such as; Fannie Mae, Freddie Mac and Ginnie Mae. The right side of the exhibit shows the “Non-Agency Backed Securities” which make up three areas of mortgage where the government is not willing to lend. Jumbo loans consist of those loans which exceed the maximum allowed loan limits which differ from state-to state. This level is set forth by the government and is any loan $417,000 or greater in North Carolina. The Alt-A loans are intended for those borrowers who do not fit in the conforming guidelines but who have a better credit rating and history than a sub-prime borrower. Alt-A loans would consist of loans for investment properties, second homes, or high loan-to-values for borrowers who would otherwise be considered conforming. The third section of this exhibit makes up the sub-prime borrowers who have less than stellar credit but are willing to pay a higher down-payment and a higher rate to get a mortgage loan. As you can see, the sub-prime sector makes up the majority of the non-agency loans. Also note that most of
In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and
According to Fligstein, the next step in market formation was crisis. In The Architecture of Markets he states, “market crisis is first observed when incumbent organizations begin to fail.” From 2007-2009, the housing market crashed as the value of homes in the US fell drastically. As a result, many homeowners began defaulting on their mortgages causing huge problems for those involved in the mortgage securitization market. On September 7th, 2008 when the Federal Housing Finance Agency (FHFA) place both Fannie Mae and Freddie Mac under government conservatorship. In addition, the US Department of Treasury agreed to inject up to $100 million into each GSE in order to provide liquidity and to continue purchasing mortgage-backed securities in the market. This would slow the US housing market’s downward spiral. In return, the government would be able to purchase 80% of Fannie Mae and Freddie Mac. The goal of these policy responses was to provide stability to the financial market and support the availability of mortgage finance.